Strategies for Managing Behavior during a Pandemic
Over the last few days, we have certainly seen some volatility in financial markets, and we are suddenly all getting used to the word "pandemic". As I’m writing this article, the S&P 500 is down approximately 11% from its all-time high in a little less than a week. For a little perspective, this is the 18th time since the stock market bottomed in 2009, that the S&P 500 is more than 5% off it’s high. This episode is due to fears over the Coronavirus (COVID-19). How will the Coronavirus (COVID-19) affect your investment portfolio? Unfortunately, the unsatisfying answer is: nobody knows. The statistics keep changing, but currently the most deaths (2,664) have been confined to China, with 15 reported in Iran, 11 in South Korea, 7 in Italy and 4 on a Diamond Princess Cruise ship off the coast of Japan. We have no idea how far or fast the disease will spread, and neither do the markets, and that is exactly what is causing this volatility. You’ve heard us say this many times - Markets hate uncertainty. If the total deaths from COVID-19 reach over 20,000 in the coming weeks, then it will have killed about one tenth of the number of people that die every year from influenza. So why do markets react so intensely to what seems to affect such a small number of people worldwide? The market concern is that reactions to the virus will have an economic impact. Shutting down schools, plants, and offices can hinder production. Consumers deciding to change their lifestyles or travel less will affect the economy because consumption drives approximately 70% of the economy. What we do know is that historically, every health-related scare has created only a short-term market correction. When the public became aware of the SARS epidemic (a previous strain of the Coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March. But, according to a historical look-back by the MarketWatch economists, the market was up 20.76% a year later. The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014 and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36 percent.
Every time we experience one of these pullbacks, things get noisy on social media, in the newspapers, on TV, blogs, radio, everywhere. Why does this always happen, when most investors would agree that this type of volatility is a normal part of investing? The reason is that investors become worried about what this might turn into. Noise increa