The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China¹. Australia’s prime minister has said the virus will likely become a global pandemic², and other officials there warned of a serious blow to the country’s economy³. Airlines are preparing for the toll it will take on travel (4). And these are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom.
These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
Here are 5 things we suggest you do… or don’t do.
- DON’T look at the markets, market commentaries or your portfolio’s value. The only effect will be to tempt one to do something- and that “something” will almost certainly be the wrong thing.
- The more bearish (negative) investors become, the more they sell short both markets and individual shares. So far, attempts to “buy the dip” have failed, but once a critical level of short positions are established, (or the news is not as apocalyptic as is currently supposed), there will be few sellers left, leading to a scramble to buy back, thus causing a sharp price rise and a re-establishment of the demand/supply balance. Market complacency is being challenged in the only way it can be- by maximising trade volumes, which in this instance means “forcing” investors to sell, via sharp declines in price.
- (Re)-examine your risk tolerances. It is easy to get over-confident (and thus over-exposed) when prices seemingly rise effortlessly. This should be an opportunity to check that your market risks are still aligned with your ability and willingness to take those risks. That should be the only reason to act (and even then, selling now may not be the optimum response).
- Focus on the long term. Unless you believe that capitalism will be brought down by a virus, this is just another bout of selling that will lead to buying again, as investors recognise that they have (once again!) over-reacted. Since January 21st, when concerns over the virus first got started, the Chinese Shanghai Composite Index has out-performed both the American S&P 500 and the German Dax Index- China is supposed to be the epicentre of this crisis!
- Things have a way of working out on their own – Bernie Sanders (Presidential candidate) IS a genuine socialist and WOULD be a disaster for both markets and the economy across the world, but betting money appears to be far more sanguine. It seems that the higher the odds of Bernie’s nomination get, the more likely it is that Trump will win.
If you have a question as a result of this update, please do get in touch
¹ Apple, February 17 press release
² Ben Doherty and Katharine Murphy, “Australia Declares Coronavirus Will Become a Pandemic as It Extends China Travel Ban,” The Guardian, February 27, 2020.
³ Ben Butler, “Coronavirus Threatens Australian Economy Reeling from Drought and Fires,” The Guardian, February 5, 2020.
(4) Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020.