Stay Calm During Market Corrections

Feb 2020

As I write this blog, markets are reeling from concerns over the coronavirus that seems to be spreading beyond Asia, where it originated.  The number of people infected has risen to about 50,000 while the number who have died has surpassed other virus’ deaths like SARS that occurred early in the 2000s.  No one knows with certainty how this will play out.  What we do know for sure is that panicking or overreacting to news headlines is never a good investment approach.

It now seems likely the coronavirus will have a large negative shorter-term impact on the global economy and certainly a more pronounced negative impact on China and its close trading partners.  As a result, global markets are falling and bracing for further negative consequences.  We do not believe this is a long-term negative for markets and are optimistic about future containment of the virus despite the recent doomsday headlines.

Markets have been on edge even before the virus became a concern, after hitting all-time highs at the end of 2019.  Investors had not experienced a market pullback or correction since late July/early August in 2019, when the S & P 500 Index fell nearly 7%.  Investors have become somewhat complacent and accustomed to markets climbing and tend to forget (maybe purposely!) that markets fall periodically.  There are always going to be reasons why markets correct and there are always periods when markets correct by 5% or more in any given year.

The chart below, put together by Charlie Bilello of Compound Capital Advisors, shows this recent market correction is the 26th since the March 2009 lows.  I would tell you that all those corrections seemed like the end of the world at the time, but they were not.  Except for year 2018, most of the other years with corrections greater than 5% ended the year on a positive note, including 2019!

I cannot be certain this coronavirus will be contained or will not spread further, but we know markets react negatively and swiftly during heightened times of uncertainty.  Regardless, investors cannot panic to the point where they make dramatic changes to their portfolios.  This can harm your longer term results.  Furthermore, I do not believe most investors can be successful jumping in and out of markets in response to short-term news.  If one were to sell stocks or bonds now in response to the coronavirus, what is the signal to “get back in?”

Just as markets are selling off based upon negative news, they will also reverse course and go up as good news comes out, which I hope happens sooner rather than later!

In summary, it is not easy for investors to remain calm in the face of negative headlines and fear but remaining calm and keeping a longer term perspective about your portfolio is the exact right approach to prevent mistakes that you cannot undo.

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