In case you didn’t notice, this has been a difficult few weeks for the stock markets.
Between swings in the Democratic Presidential race and fears of the Covid-19 virus becoming a global pandemic, there has been plenty to stoke fears of future economic turmoil. And the media has been loving every bit of it, and has been feeding into those fears.
The reality is a bit more muted than the media hype, however.
First, let's take a look at the race to represent the Democratic Party in the Presidential Election. Almost from the beginning, Joe Biden was the front runner for the nomination. He has extensive political history, is largely looked upon favorably by many, and has served as the second in command for eight years. After poor performances in the Iowa caucuses and New Hampshire primary, many became fearful of a Bernie Sanders nomination. With Bernie’s love of Socialism and praise of socialist/communist regimes such as Cuba, Venezuela, and the old Soviet Union, many feared that our business world would be under attack, leading to a similar economic fate as those failed countries.
The reality, however, is that Bernie Sander’s philosophy is still a fringe position in today’s American politics. It is growing, but not fast enough to play a big part in this years election. We saw that manifest itself in the larger votes on Super Tuesday. While the country has been moving to the left for a while, we are still a largely center right nation.
The other hot topic of the moment is the Coronavirus. You can’t turn on the news, open a social media site, or turn on a radio station without hearing about it. People are changing travel plans, conferences are being canceled, and people are hoarding food and cleaning supplies. You can’t find hand sanitizer in Sumter today.
The reality is that these types of illnesses happen all of the time. Over the last dozen or so years we’ve had Bird Flu, Swine Flu, and SARS, just to name the big ones. The Swine Flu outbreak of 2009 killed a confirmed 14,000+ people around the world, and more than 3,600 in North America. Compared to Covid-19s 3,383 global deaths, the 2009 version was much worse.
That hasn’t kept the media and politicians from making as much of this as possible. Due to government mandated quarantines, travel bans, and trade route closures we will see a decrease in economic activity. This week, China released a report of manufacturing activity and it showed the lowest reading in modern times. But these are short term issues that will be relieved as the virus gets under control.
So, If these issues are short term in nature, why would the market drop so much? The unknown. Stocks tend to trade in line with profits over time. When profits are up, stocks often go up and vice versa. Right now, the markets aren’t sure what will happen to profits, so they’re discounting the unknown. As we get clarity of the impact of the quarantines and travel restrictions, I would expect the markets to recover. Unfortunately, we just don’t know how long that will take.
Another reality is that volatility is actually pretty normal for stock markets. One popular measure of volatility is an index called the VIX. While it has spiked to near 40 in the last few days, this is the sixth time it has been over 30 since the Great Recession ended in 2009.
Finally, what should we do during times like this in the markets? Stay calm! One of the worse things that one can do is to over react and sell everything. Markets could go down more. Or, they could recover tomorrow. The reality is that no one knows what they will do. We do know that every time that the markets have fallen in the past, they have recovered. In 2008, when things seemed dire in the financial world, I heard someone say that people still needed to put food on the table, clothes on their back, and educate their children so while things seem bad, the world will not come to a stop.
If you’re still working or have money available, this may be a great time to increase your contributions to your retirement account or add to your portfolio, as you’re probably buying on sale. If you are retired and taking distributions from your investments, this may be a time to review your portfolio and get a risk assessment done. While I don’t support the idea of selling out of your investments, you may need to lower your risk some. I utilize an online tool that uses history and an algorithm to score a portfolios risk on a scale of 0 to 100. Let me know if you want to see where your portfolio falls on the scale. And if you’re worried, call me. I’ll be happy to take a look at your situation and see where I can help.
I hope you have a great weekend. Spring is around the corner, so lets enjoy the break in the rain!