Coronavirus Update: Navigating The Stock Market During an Outbreak
This doesn't mean retirement is out of reach!
The recent spread of coronavirus has everyone a little nervous; people are not only worried about catching the virus, and what might happen to them if they do, many are frightened by the panic surrounding the virus. All of this uproar has sent financial markets, and the value of investment portfolios and retirement accounts, spiraling downward. The strong market of the past few years has ended.
Today, many 401(k) plans, IRAs, and other retirement accounts are directly or indirectly invested in the stock market. Loss in value of retirement savings of millions of people is directly correlated with the low profits of many companies across the board. All of these factors combine and contribute to the stock market’s decline.
However, panic surrounding Coronavirus does not have to alter your plans for early retirement as long as you do not panic.
What is Coronavirus?
There are many misconceptions about what coronavirus is and is not, and these misconceptions have contributed to the panic that has surrounded the outbreak.
Coronaviruses are nothing new. They are a type of virus that can cause a wide range of respiratory diseases, which include the common cold. The outbreak of this deadly new strain of the virus, which is officially called COVID-19, began in December of last year in the Chinese city of Wuhan. From there, it spread across the rest of the world, moving from person to person.
At this time, there have been 127,809 cases of COVID-19 reported around the world, including 1,336 in the United States. There have further been 4,633 deaths reported, with 38 of these in America. China has been most affected with 80,796 cases and 3,169 deaths.
Currently, there is no vaccine for COVID-19, and on March 11, 2020 the World Health Organization (WHO) officially declared it a pandemic.
Human lives are obviously the greatest loss, but since the first reported case of the virus on December 1, 2019, the S&P 500 has fallen 13.542%.
Outbreak and the Financial Markets
You may be wondering why the spread of coronavirus has caused the financial markets to tumble so drastically, and what that will mean for your investments going forward. Know this: other epidemics in recent years have had little effect on the markets.
This graph examines the market returns one, three, and six months market returns after declaration of an epidemic. Via Charles Schwab.
It’s difficult to correlate the exact effect an epidemic has on the developed markets as other world events could have also been in play. Perhaps though, it can be inferred the larger the market-cap the farther the fall when a serious illness appears without a vaccine or cure. In any case, the graph shows recovery was quick and multifold.
While (ir)rational panic has likely exacerbated the stock market’s downturn, there are tangible reasons for it as well.
- Disruption in Supply Chain:
- The spread of the virus has significantly disrupted supply chains around the world. Widespread production interruptions are prevalent in the face of the novel Coronavirus.
- Because China is the world’s leading exporter, this is affecting the supplies of many of the products that it makes, such as smartphones.
2. Profits at Risk:
- Investors are aware this fault in supply-chain-distribution will stagnate the profits of the companies that depend on goods made in China, causing the price of their stocks to fall.
- Never has the globalized world experienced a total slowdown of this magnitude.
3. China’s Value to the World:
- China’s percentage of world GDP has grown significantly in the past decades. In 1990 China was worth 1.61% of the world’s GDP.
- When SARS became an epidemic in 2003 China was valued at 4.31% of the world GDP.
- Almost twenty years later China’s worth (of global GDP) in 2019 was valued at more than 19% by the IMF (International Monetary Fund)
4. Officially a Pandemic:
- Events across the world have been cancelled, including the suspension of the NBA season and Euroleague Soccer.
- Italy is in total lockdown, and other countries have closed borders; aside from 9/11 it’s hard to remember a time in which the World was brought to its knees.
5. Lower Consumerism Demands:
- Investors are also worried about the effect of the virus on world demand. China is not only the world’s largest exporter, but it is also the world’s fourth largest consumer market.
- COVID-19 has been disrupting demand all around the world, including oil supply. Currently Saudi Arabia and Russia are engaged in a bitter oil-price war, flooding the market with cheap crude currently valued at under $34/barrel.
- Less demand has caused an unprecedented economic slowdown worldwide. Goldman Sachs chief US equity strategist David Kostin expressed it’s likely “US companies will generate no earnings growth in 2020.”
How Long Could the Corona Crisis Last?
One of the biggest questions that you may have about this crisis is how long it will last. While no one can provide a definitive answer, this is not the first time that medical science has had to combat a serious coronavirus outbreak this century.
In November 2002, a strain of coronavirus called severe acute respiratory syndrome (SARS) spread from China across the world. It spread like COVID-19 through person-to-person contact. While this virus affected far less people than COVID-19, it had a higher rate of mortality in comparison. Luckily it was quickly controlled, but only after 774 people lost their lives.
In 2012, another strain of coronavirus called Middle East respiratory syndrome (MERS) spread from Saudi Arabia to 27 countries, killing 858 people according to the WHO.
These past epidemics have given science a head start in finding a cure for COVID-19. Chinese scientists quickly sequenced and shared the DNA of COVID-19 just weeks after its discovery. In fact, one group of Israeli scientists already believe that they will have a vaccine ready in a matter of weeks, but it will take some time for approved trials and use in human subjects.
So, there is good reason to hope that the crisis surrounding the virus will not be long lasting. Just in case this economic downturn is long-lived, it’s important to act proportionately and understand past market trends of major stress periods and how long it took to return to normalcy.
Why Investors with Retirement Money in the Market Should Not Panic During Major Stress Periods
Investing and retirement is about playing the long game, and it comes down to numbers.
It’s natural to feel an urge to sell off your stocks in the face of massive drops in their value. You should resist this urge especially with money invested for retirement. Afterall, investing for retirement is about targeting numbers, and understanding what percentage of your yearly income you’ll need to be comfortable when that time comes.
By pulling out of the market during a major stress period, you’re almost guaranteed a loss. It’s simple history: there have been major downturns in the markets that have caused stocks to fall similarly, if not worse, than it has done during this downturn. In all cases the markets rebounded.
This current situation highlights that disease CAN cause market corrections, but we need to wait to fully assess the impact COVID-19 will have.
The following chart lists major stress periods in the market and how long it took for developed equities, investments income, and asset allocation to recover. The total recovery time across all investments is approximately 2.6 years.
The 1998 Bear Market
The 1998 bear market took root in the summer of 1997 when several Asian countries (Thailand, Indonesia and South Korea) experienced a significant depreciation of their currencies.
While this did not initially affect the stock market, when Russia experienced a similar crisis in August of 1998, it led to the near collapse of a major U.S. hedge fund called Long-Term Capital Management and a swift decline in the stock market. In just two months, the S&P 500 fell 11.75%.
It only took 3 months for the markets to recover, and from November of 1998 to September of 2000 the S&P 500 rose 28.278%.
The 2000 Dotcom Bubble
The bear market in 1998 paled in comparison to the bursting of the Dotcom Bubble in 2000, which wiped out trillions of dollars of wealth.
Driven by the over-evaluation of Internet-related stocks as well as other factors, the NASDAQ index fell from 4,234.33 on September 1, 2000 to 1,108.49 in October of 2002. Even the broader S&P 500 index fell an incredible 41.785% during this downturn, which is more than three times what the index has lost in the aftermath of the coronavirus outbreak.
Not surprisingly, it took the financial markets significantly longer to recover from this downturn compared to previous ones. Ultimately, after 49 months, the markets regained their footing. The recovery time of the “.com bubble” was only surpassed by the Great Depression that followed the stock market crash of 1929.
Why the markets took so long to recover
- The events of September 11, 2001 stopped the market in its tracks and added additional stress
- The subsequent upheaval thereafter took a while to return to “life as normal”. The USA realized oceans of physical distance won’t keep its citizens safe.
- Ultimately wars (we are still fighting to this day) that resulted from it.
By October of 2006, the S&P 500 had fully recovered from its losses, and from there it rose 7.335% over the course of the following year.
The Great Recession of 2008
While it is known as the Great Recession of 2008, the roots of the crisis started in 2006 when housing prices began to fall, triggering a subprime mortgage crisis. Many titans of Wall Street were left holding large amounts of worthless mortgages.
Global financial services like Lehman Brothers and Merrill Lynch, either collapsed outright or came close to it. The U.S. government also had to take over the two government-backed companies that insured the mortgages: Fannie Mae and Freddie Mac.
Eventually, the crisis reached the stock market. On September 29, 2008, the Dow Jones fell 777.68 points, which was then the largest drop ever. From November 2007 to February 2009, the S&P 500 fell 44.975%, which was its largest drop since the Great Depression.
The stock market recovered even faster compared to the Dotcom Crash, in just 37 months. From March 2012 to October of 2018 markets skyrocketed 100.5%.
The Global Stock Market Downturn of 2018
The Global Stock Market Downturn of 2018 came in October of that year, with the S&P 500 falling 7.832% in three months after setting an all-time record high that September. This decline was largely driven by fears that a global economic slowdown was upon us.
But these fears did not last long. By April of 2019, the markets had fully recovered what they had lost during the downturn, and from this point until the outbreak of COVID-19 the S&P 500 rose 9.4%.
The Cumulative Effect of the Downturns on the Financial Markets
From August of 1998 to December of 2019, the stock market suffered 4 major downturns, two of which were far worse than what we are experiencing right now. But what was the cumulative effect of all this?
During this period, the S&P 500 still rose 174.668%, with an annualized return of 4.831%. With dividends reinvested, the cumulative return was 306.3%, with an annualized return of 6.765%.
We can’t control the markets, but we can control our behavior when the markets go crazy.
The lesson from all this is that investors would have netted huge returns if they did not panic when trouble arose. It’s important to understand that the markets will eventually rebound. Those planning to retire early, or who are close to retirement age, should remember controlling asset allocation with a focus on growth over the long term is the way to go.
The same holds true for the Coronavirus crisis. Retirement investments may be bruised, and in worst-case-scenario delayed, but you’ve got to hang on, hold tight, and look to history. Statistics are on the side of the investor (aka you) despite the immediate knee-jerk reaction of the markets.