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Investors: market reaction to virus outbreak

Famed investment and money guru Dave Ramsey posted on his social media his comments pertaining to the coronavirus and investments:

 

The media over states things … and that’s the understatement of the day.

Don’t cash out your investments.  The only people who get hurt on a roller coaster are the ones who jump off.

Wash your hands and go about your life.

-Dave Ramsey

The media has a way of whipping people into a frenzy.  Don’t get me wrong, there are reasons for attention and concern but sometimes the headlines serve to amplify a situation in a way that creates irrational fear among the masses.

The number of coronavirus cases outside of China recently spiked.  This caused panic among investors. We have seen a drop in equity markets over the past several trading days.  On the positive side, the number of coronavirus cases in China have been decelerating but because of the outbreak in countries outside of China, specifically Iran and Italy, it creates heightened concern about the inability to contain the virus globally.

There is certainly reason to take note as an investor.  Afterall, the correction we have seen in the stock market over the past several trading sessions is the fastest 10% decline in the S&P500 from a record high.  The speed of this decline even beats the Black Monday episode in October 1987 which can shake even a seasoned investor.

Quite prudently, investors are trying to understand the effect of the coronavirus outbreak on global investment markets and in turn, the effect on their personal investment portfolios.  Time to understand it?  Yes. Time to jump? No.

At times like these it helps to look at a lesson in history.  This isn’t our first global virus outbreak and it most likely won’t be the last.   While each virus is unique we can look back and see how the market has previously responded to viral outbreaks.

How have markets reacted to virus outbreaks in the past? 

While we don’t know what the ultimate effects of the coronavirus will be on investment markets, it can be helpful to look to the past for reference.  The chart below highlights how the S&P 500 has performed during similar virus outbreaks in the past.  

You can see that while the market impact has been negative in response to viral outbreak, the length of time for the drawdown has been inconsistent.  You can also see the long term impact has been limited. In each of these virus outbreaks, markets were higher 12 months after the virus was identified.

Source: Bloomberg Finance L.P., CitiResearch, FactSet.  As at February 27, 2020.  The starting date for the 12-month return is the month each virus was identified. Provided courtesy of CI Investments.

Market volatility is one of the greatest everyday challenges investors need to overcome.  Market volatility is caused by many reasons and a virus outbreak is just one of them.  Investors should likely be prepared for markets to remain choppy as more information becomes available.  

If you find yourself worrying about the coronavirus and the effect on your portfolio, take a moment to make sure your emotions are in check.  Allowing your emotions to guide your investment decisions can lead you to inopportune times to buy or sell.

As always, if have any questions about the markets or your investments we are here to help.  Please feel free to contact any of our Farrow Financial Services team members.

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Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation.  Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010.  Stephanie and her husband own Farrow Financial Services Inc.  About our Farrow Financial Team.

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Photo credit Pixabay