The coronavirus, or COVID-19, is causing widespread alarm in financial markets, as the world works to contain the spreading virus and scientists work to gain a better understanding of the disease. Stocks have fallen 10% from their peak just over a week ago and the stock market is dancing around correction territory. Bonds are also echoing the pessimism, with Treasury rates falling to record lows.
As investment managers, our job is to keep emotions out of your portfolio and maintain a long-term focus in our investment process. Though corrections (stock market declines of 10% or more) have been infrequent since the Great Recession and thus our memories, they happen on average about once a year. In the greater context, corrections rarely last that long, averaging 72 days (going back to 1945), a shorter period than bull markets. In fact, years with big declines in stocks are not uncommon. Large cap stocks fell 37% in 2008, of course, but also fell 22% for the year in 2002, 12% in 2001, 26% in 1974, and 15% in 1973. Each time we’ve gone on to set new highs in the markets, with those investors willing to stay the course, or even buying stocks as the market sold off, profiting the most in the long run. Many of the years with the biggest corrections ended with positive returns.
Our philosophical commitment to asset allocation gives us the confidence that different parts of client portfolios will respond differently to this event. High grade corporate and government bonds will likely see prices rise, increasing their percentage allocation in portfolios and necessitating the purchase of stocks as that allocation declines as a percentage of the total. Rebalancing, in theory, is a great way to attempt to “buy low and sell high” or at least reduce the incidence of selling high and buying low.
If this time “feels different,” that is a completely normal reaction, but it’s important to remember that each time feels different. This country has known times of panic, hunger, war, and disease, and each time the markets have marched higher and the economy has recovered from downturns. We aren’t sure whether there will be a recession to come from the coronavirus, but it is certainly more likely than it was heading into 2020. Recession or not, there is likely to be a negative economic impact. Despite that impact, we are confident in our portfolios, perhaps even using this as an opportunity to create value and buy stocks at discounts from their recent highs. And remember, we are always committed to the prudent stewardship of the money our clients have entrusted us to invest.
Please be patient but don’t hesitate to call or come in if you have questions, concerns or your circumstances have changed that may impact your risk tolerance for your portfolio.