With the perspective of hindsight, it appears that past health scares, including SARS (2003), Swine flu (2009) and Ebola (2014), tend to follow a standard script for investors, the markets, and the economy. It includes:
- The spread of the disease and rising death toll insert a sense of alarm among investors, and equity markets sell off.
- Commodity prices fall in anticipation of weaker global demand.
- People shop less and delay travel. Companies turn cautious and postpone investments.
- However, as health care authorities work to contain the outbreak and the number of new cases falters, financial markets subsequently rally and the economy rebounds. After the three earlier viral outbreaks this century, U.S. equities quickly recovered.
Having invested through three health epidemics, it is tempting to take a cavalier view on the ramification from the Wuhan virus, yet it’s worth acknowledging the threat of SARS and last time a severe epidemic had repercussions for global markets.
The SARS-panic of the early 2000s is a distant and unpleasant memory, but the historical context offers useful guidance in case the situation quickly and unfortunately devolves. Within the period from the initial report of the virus in late 2002, to the World Health Organization declaring the disease contained in Jul ‘03, there were several noteworthy market moves as investors assessed the potential fallout.
In the current situation, the key is the impact on confidence (both business and consumer), commodities, and the international flow of goods—as if the trade war wasn’t enough.
From early Dec ‘02 to late-Apr ‘03 the Hang Seng declined nearly -20%, and the S&P 500 reached as far off as -17% – although eventually recovering as dip-buying appetite emerged (S&P 500 began the month of January 2003 trading at 992.54). SARS was hardly the only variable guiding trading, but surely added a tailwind to selling pressure.
Investing Lesson from Past Epidemics: We Can't Foretell the Future
Whether we study SARS, swine flu, or Ebola, the lesson for investors remain the same: The market has no memory. Don’t time the market! Don’t try to figure out when to get in and when to get out—you’d have to be right twice. Instead, figure out how much of your portfolio you’re comfortable investing in a balanced stock and bond portfolio over the long-term so you can capture the up markets and ride out the down markets. Your trusted Advisor can help you make this determination, as well as prepare you to stay invested during times of uncertainty.
Sadly, not enough “market experts” subscribe to this point of view. They’re still trying to predict the future. You’ve probably heard the saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.” People have made this same mistake for many decades.
We’ll never know when the best time to get into the market is because we can’t predict the future. And if you think about it, that makes sense. If the market’s doing its job, prices ought to be set at a level where you experience anxiety. It’s unrealistic to think the market would ever offer an obvious time to “get in.” If it did, there would be no risk and no reward.
So what should you do with the recent Coronavirus hysteria? Keep in mind the most important investment lesson: Stay a long-term investor in a broadly diversified portfolio. Reduce your anxiety by accepting the market’s inevitable ups and downs.
The Key to Successful InvestingHistory has shown, the basics of successful investing begins with owning a broadly diversified investment portfolio, and then staying invested. Striving to time the market is extremely difficult, particularly when good days and bad days tend to cluster together. In fact, over the past 20 years, six of the ten best days occurred within two weeks of the ten worst days. The best approach during this period was to ignore the noise.
Financial markets are inherently forward looking, and the reality of the situation is that although 2020 is now underway, you cannot invest with 20-20 hindsight. Some things in the coming year will go right, while others will go wrong; the key is to own a broadly diversified portfolio that can absorb the markets twists and turns.
By their very nature, headline related market corrections will test patience and trick emotions, tearing the most stalwart investment scheme and shredding it to ribbons. Stay diversified. Stay invested.