The outbreak of the coronavirus has damaged investor confidence, resulting in back-to-back declines of 3% in the S&P 500 on Monday and Tuesday. It’s unsettling, but not uncommon; we’ve now had 80 such daily declines of 3% or more since 1990. Putting aside today’s performance, U.S. markets fell 7.6% from last week’s record high; notable, but well below the average intra-year decline of -14%.[i]
Every sell-off is unique, but the formula is familiar; overconfidence collides with a catalyst, causing investors to realize that perhaps they’re out over their skis.
Changes in confidence are hugely important but nearly impossible to predict. Confidence isn’t rules-based. We put on a sweater when we feel cold, not necessarily when the temperature falls to a certain degree. Last week the coronavirus felt contained. This week it doesn’t. Last week we were at all-time highs. This week CNBC hurried out their “Markets In Turmoil” special twice. Change can happen quickly.
We’re told that our government is doing a great job of handling the coronavirus threat. We can’t know if that’s true or not, but it seems to be the baseline assumption for now. To the degree that investors remain confident in that, the situation should stabilize. But if confidence turns, it could turn quickly.
Not surprisingly, Wall Street is looking for insights about what to expect from a swiftly spreading epidemic. The talking heads on CNBC have transmogrified into immunologists and epidemiologists. There are even hedge funds analyzing zombie movies to see if they can find an edge. (Sadly, I’m not kidding). They did the same thing with SARS, the swine flu, Zika and Ebola. But we muddled through those outbreaks and we’ll get through this one too.
It will take some time for the economic ramifications to surface, but that process is well under way. Everyone knows that China’s economy has ground to a halt. People all over the Far East are staying home, willingly or otherwise. We all know that supply chains are under pressure with some possibly broken. Since we all know it, it’s been priced in already. Plenty of damage has already been done in foreign markets. But there remain plenty of unknowns out there.
Weeks like this are a good reminder that volatility tends to cluster. It’s not distributed evenly. Sometimes stocks go for years without a daily decline of 3% or more (2004—2006, 2012—2014) and sometimes you get a decade’s worth of volatility in a few days. But the market’s best days tend to be in very close proximity to its worst days. And you do not want to miss them. Over the last 15 years, if you missed the 10 best days in the market, your return would have been cut in half—4.13% versus 9.00% for those who stayed invested.[ii] “Stay calm and remain invested” is a tiresome platitude, but it really is the best advice in times like these.
Going forward, we’ll probably see suppressed profits in the first quarter and beyond, and I expect some companies will “kitchen sink” their results—bringing out the bad news they’ve been hiding so they can blame it on the virus. But earnings will eventually recover as the virus dissipates, leaving investors to turn their focus back to the fundamentals. In the meantime, we continue to remain defensively invested.
–Your team at SIMA Wealth Partners
P.S. Wash your hands.
[i] Source: J.P. Morgan Guide to the Markets, 1980—2019
[ii] Putnam Investments. S&P 500 total return from 12/31/04—12/31/19
Investment advisory services are offered through SIMA Wealth Partners, LLC and SIMA Retirement Solutions, LLC. The firms are registered as investment advisers and only conduct business in states where they are properly registered or are excluded from registration requirements. Registration is not an endorsement of the firms by securities regulators and does not mean the investment advisers have achieved a specific level of skill or ability.
SIMA Wealth Partners, LLC and SIMA Retirement Solutions, LLC reserve the right to edit blog entries and delete comments that contain offensive or inappropriate language. Comments will also be deleted that potentially violate securities laws and regulations.
All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.
All opinions represent the judgment of the author on the date of the post and are subject to change.
Content should not be viewed as personalized investment advice or as an offer to buy or sell any of the securities discussed. Content should not be viewed as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.
Historical performance returns for investment indexes and/or categories, usually do not deduct transaction and/or custodial charges or an advisory fee, which would decrease historical performance results.