It has been a crazy week in the market. By weeks end, the SP500 has lost ~12% … roughly where the market was back in September (not that long ago). And that is after the market returned 30% in 2019.
The current issue is being blamed on the outbreak of the corona virus (COVID-19) and how it will negatively impact the economy. And possibly to a lesser degree, on Bernie Sanders locking down the Democratic nomination come Super Tuesday.
I do not claim to have any idea how far this outbreak will spread, nor how many lives it will claim, before it is brought under control. I’m reasonably certain that many (or perhaps most) of the world’s leading virologists and epidemiologists are working on it, and I believe that their efforts will ultimately succeed. Clearly, this is nothing more (or less) than my personal opinion. But if the rich history of similar outbreaks in this century is any guide, this would seem to be a reasonable hypothesis.
Source: Stockcharts.com
I draw your attention to:
SARS in 2003-04, also originating in China
The bird flu epidemic in 2005-2006
In 2009, a new strain of swine flu
The Ebola outbreak in the autumn of 2014
The mosquito-borne Zika virus outbreak in 2016-17
Without belaboring the point: the super-spreader of SARS – a fish seller – checked into a hospital in Guangzhou on January 31, 2003, basically infecting the whole staff. The epidemic exploded from there.
On that first day of the litany of epidemics cited above, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), this past Friday the Index closed fairly close to four times higher. I’m confident that you see where I’m going with this.
You are investing for the long term, to reach long term goals. Several investment principles to be considered:
1. Stocks are completely irrational in the short term, making mad swings throughout days and weeks. However, stocks are completely rational in the long term, they grow at 9.5% per year.
2. Looking at past data, drops like this weeks, happen every 12-18 months and last 4-6 months.
3. Think like a business owner. We are not buying tickers, we are buying the best businesses in the world, with strong moats, great innovation, access to capital and willing purchasers. While there will be short term disruptions to these companies, its best to view them as wonderful assets ON SALE.
4. Always have some cash on the sidelines. It will help see you through turbulent times, as well as providing liquidity for buying opportunities. (For those of you whose money I manage, we just allocated some of your cash stock pile. to buying).
I don’t have a crystal ball, so I can’t tell you that stocks won’t drop another 10% next week. They could very well … or they could rally. What is important is that you understand market volatility, while committing to investing through it.
If you have any questions or concerns about your investments, please don’t hesitate to reach out to me. I am here to help.