U.S. stocks are off approximately 12% over the past week, erasing the earlier gains of this year. It’s not only the amount of the drop, but how quickly the markets have dropped from recent record highs that has made investors nervous. The uncertainty from the spreading impact of the coronavirus, both from a health impact as well as an economic impact, is concerning investors. While there is still much uncertainty regarding the virus and the media is not helping with their constant bombardment of the latest scary headlines, we need to put things into perspective.

The news on the virus remains very fluid and there are new developments daily, if not hourly, and there is much we don’t know yet about the virus and the potential impact. We aren’t healthcare experts as there are plenty of other sources with updated information on how to best protect yourself from the virus, but we’ll focus more on the economic and market impact.

While we don’t want to make light of the current death toll and the seriousness of this virus for health reasons, here is some perspective to think about:

  • The number of active cases in China where the virus originated has peaked and the rate of new cases is slowing.
  • The mortality rate in China has been 2%, but outside of China, has been closer to 1%. This is much lower than SARS, which was around 10% which hit in 2003.
  • Over the past 40 years, there have been 12 major viruses that were deemed extremely serious, starting with HIV/AIDS in 1981, followed by the Pneumonic plague, SARS, Avian flu, Dengue Fever, Swine flu, Cholera, MERS, Ebola, Rubeola, and Zika. Each incident was scary at the time, especially early in the news cycle, but the stock market was positive six and 12 months later in almost all cases.
  • Since 1994, the World Health Organization (WHO) has declared a world health emergency many times. On average, the stock market has been up 10% six months after the day of declaration.
  • One of the greatest pandemics in the history of the world, the Spanish Flu which hit after World War 1, ended up killing millions of people, or approximately 3% of the total world’s population, according to some sources. Yet, the following decade turned out to be a very strong economic and stock market boom.
  • Looking at another crisis, we can look back to the tragic events of the 9/11 Terrorist Attack. Our economy was virtually shut down for weeks and many people stayed home and deferred travel for months. This is similar to what could happen here. Yet, a balanced portfolio of 60% stocks/40% bonds was up 40% after three years and 81% after five years.

Stock market going down

From an economic perspective, there are lingering questions on the impact on the U.S. and global economy in the coming months. Already, there are supply chain disruptions, which could get worse before it improves. Travel is already being curtailed. These various shocks will cause some level of economic contraction, but tough to quantify how deep and how long. Keep in mind, whatever shocks it in the short term could lead to a sharp recovery on the other side as things get back to normal and inventory levels are rebuilt.

In summary, we have to understand stocks are risky and will go through periodic corrections. It is the risk associated with stocks that justify the longer-term returns you gain by sticking with them. In fact, since 2009, there have now been 26 corrections of at least 5% of more. On average in any calendar year, stocks will have a 13-15% drawdown from their intra-year highs. Up until a few weeks ago, the U.S. stock market was at a record high, despite all of the declines caused by prior health issues, wars, election cycles, recessions, and any other major problem in history. It has always recovered to go onto higher levels.

Currently, bonds are playing the exact role that we would like them to during a stock market draw down. They are softening the blow, smoothing out the ride, having a negative correlation to stocks, and even having a slightly positive return for the week. If you have a reasonably diversified portfolio, meaning a decent allocation of bonds and alternatives (which help protect your downside risk), in addition to your stock investments, you should be prepared to ride out the current storm as it will eventually pass, though no one knows whether the news could get worse before it gets any better.

As always, contact the First Bank Wealth Management team at 800-452-1414 with any questions, concerns, or if you wish to discuss your current investment situation in more detail with us. We’re here to help.