When a market reaction is as violent as the current one, it is always due to fear. More specifically, fear of the unknown. Having no idea what will occur tomorrow, much less the next several weeks, months or years in the future, allows human emotions and psyches to run rampant and envision the absolute worst possible situation.
The last big bear market, for example, scared the daylights out of most investors. If you care to remember: Lehman Brothers went out of business, AAA-rated mortgage backed bonds defaulted overnight, and money market funds were set to freeze their assets until the US government stepped in. None of those things had happened before, and fear of the unknown helped generate the deepest bear market in most of our lifetimes. That bear market bottomed in March of 2009, and two years later, 60/40 portfolios climbed to new all-time highs.
But this week’s plunge is even more interesting, and potentially scary, because its cause not only can crush a portfolio or an economy, but it can kill you. That’s truly the stuff of your worst nightmares. The news of the Wuhan Coronavirus hit when many global stocks were at or near their all-time highs – a time when bad news can easily deflate overvalued equities.
However, much of this fear is built on false premises, and is not nearly as scary and unknown as investors may think. That is because this is NOT the first time that a global virus had the potential to damage both humans and their portfolios. In fact, there have been several diseases that have done just that. In the chart below, see how many of the epidemics you remember, and how the markets performed 6 and 12 months after these viruses started to infect humans.
We cannot guarantee that US market performance over the next 6 and 12 months will mirror the returns seen above. Every pandemic is different, and each has its unique characteristics. However, to assume the absolute worst-case scenario, when history has meaningful examples contrary to that fear, is not the prudent basis from which to manage an investment portfolio. We believe the sensible reaction to the current market environment is to do nothing. Equity portfolios promise greater long-term returns compared to many other asset classes precisely because of these types of global risks and fears. Attempting to flee equities when they are in a free-fall condition has never been a good reaction for a rational, long-term investor.
We invite you to contact your DHGWA advisor if you would like to discuss any aspect of the current market condition. In the meantime, keep rested, eat well, wash your hands often and perhaps don’t listen to as much TV or make as many clicks of your mouse on this subject. Remember, fear sells better than calm. As difficult as it might be, we encourage you to not allow a source of news to interfere with the progress of your life.