Last week, coronavirus fears sparked a 11.5% selloff in the S&P 500 stock index, the worst market week since the 2008 financial crisis. The actual value of the companies that make up the major indices are almost certainly not 10% less valuable today, as businesses, than they were last Monday. The market drop is a panic attack, pure and simple, and real valuations should eventually reassert themselves. The bad news is that neither we nor anyone else has any idea how long the panic attack is going to last, or exactly what those real values are, and we don’t yet know whether the triggering event—the coronavirus will spread into a pandemic, and if it does, how much damage it will do to the world economy.
Certainly, governments around the world are reacting quickly and forcefully. Airline routes are being shut down. Large gatherings, like business conferences, are being canceled or postponed. Even the Louvre was closed over the weekend. Nike is closing its headquarters for a deep cleaning. Last week, only a few US labs could test for the coronavirus. Already 93 labs have testing facilities. At least 20 companies are working on a vaccine. While new cases continue to show up in China, the epicenter of the outbreak, the number of new cases there are falling. Indeed, Starbucks, which closed 400 stores there has now re-opened about 80% of them and the Apple factory there has also re-opened.
The damage, economically, will be real. Chinese economic activity in February declined dramatically. Supply chains are being disrupted. Profit expectations for big multinational U.S. companies are falling, adding to the worries currently gripping markets. Equity analysts at Goldman Sachs forecast that U.S. companies will generate no earnings growth in 2020 if the coronavirus becomes widespread.
Even though a lot of attention has been given to the virus’s impact on the markets, the more important issue is the health of you and your family. Medical experts say simple surgical masks will not prevent wearers from the virus and that we should be conscientious about washing our hands and using hand sanitizer and cleansing wipes. In 98% of the cases, the disease is not fatal, but it does seem to be more dangerous for older people. Our wish is that you and your family will stay well, and that the virus will not become the pandemic that many are fearing.
If you're a disciplined investor pursuing an effective long-term strategy, this is a lousy time to change what you're doing. As long as your asset allocation and investment strategy reflect your risk tolerance, you don't need to change what you're doing with your money right now... or at any time. Although market prices are down, your portfolio income is unchanged.
It's clear that many people are panicking about the coronavirus. We can't predict the future... This could be the early stages of a prolonged downturn. Or the bull market could get through this rough patch and keep marching higher... like it has done before.
But one thing is certain...Other investors' fears about the coronavirus are not reasons to change what you are doing. The panic might continue, or we might experience a quick recovery. Historically, the best plan when bear markets present themselves is to sit tight, and our goal for you is to follow the best plan we know and wait for the recovery.
Craig A. Vander Molen, CFA, CPWA ®
Managing Director and Chief Market Strategist