As markets come to a close on Thursday, February 27, 2020, the S&P 500 Index (U.S. stocks) and MSCI All Country World All Cap Index (global stocks) have officially entered into a correction (defined by a 10% drop from the most recent high). As equity markets experience turmoil due to concerns surrounding the coronavirus outbreak, it’s important that we take a step back and look at the situation in the context of prior pandemic outbreaks and broader market volatility.   

  • The coronavirus is of the same family as two other viruses that had outbreaks in the past 20 years: SARS in 2002-2003 and MERS in 2012, both of which caused travel and economic disruption but fewer than 1,000 deaths each, a figure which COVID-19 has already surpassed.1
  • As of February 24, there were approximately 80,000 cases of the coronavirus globally with more than 2,600 deaths.2
  • The case fatality rate (deaths per confirmed case) is still very uncertain, as is characteristic for this period of an outbreak; when data is available, we could compare it to MERS (35%) and SARS (10%).1
  • Economic growth and markets have historically responded with a V-shaped pattern. The temporary hit to economic activity results in pent-up demand, which eventually helps fuel the rebound in economic activity. This recovery is typically led by retail and manufacturing sectors, since lost revenues are harder to recoup in the services sector (think of tourism).3
  • Looking at the past 13 global health crises (1994-2019), in all but one instance equity markets were positive from the three months leading up to the declaration of the global health crisis through the six months after (nine-month total period).4

Commitment to your Financial Plan

Scary news headlines may spark rapid sell-offs and stir panic for some investors, but it’s important to focus on the big picture. Trying to time the market based on short-term headlines is an extremely difficult task and can end up hurting investors over the long term. Savant’s investment philosophy is focused on broad global diversification with the goal of achieving strong risk-adjusted returns over the long run. Stretches of high market volatility and sharp sell-offs are simply a part of the game when it comes to investing. Having a well-planned investment portfolio with an appropriate asset allocation provides the ability to stomach these types of events and is what can separate the good investors from the rest. 

We don’t have to look back far for an example of when reacting to sharp market declines could have caused investors to miss out on future returns. During the 4th quarter of 2018, global stocks (MSCI All Country World All Cap Index) experienced more than a 13% decline, causing some investors to question if there was a recession on the horizon. We now know that jumping ship at that time would have been a poor choice as global stocks rallied by more than 26% in 2019, reaching all-time highs throughout the year. There are many examples of where trying to time the market can end up hurting investors; this is just one. 

The ultimate economic impact of the coronavirus will continue to be uncertain over the coming weeks and months, with headlines surrounding the situation potentially driving markets in either positive or negative directions. As your financial advisors, it is our job to help guide you through these difficult times and keep focused on your long-term goals. Please reach out to us if you have any questions or would like to discuss further.

Sources: 1 – World Health Organization, 2 – Center for Disease Control and Prevention, 3 – Mike Pyle CFA, BlackRock, 4-Cliffwater. Data source for market indices: Morningstar Direct.

Author Gina M. Beall Director of Investment Research

Gina has been involved in the financial services industry since 1991 and has a membership interest in Savant. She earned an MBA degree from DePaul University.

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