Click the button below for more information on how epidemics have influenced the market in the past:
This week has seen the markets fall, including the largest single day’s point decline in US stock market history. You may be concerned, and I want to share my observations and recommendations with you.
The economy is fundamentally sound. Interest rates, unemployment, and inflation remain low. This does not mean we won’t see a significant pullback or even a bear market. But turns in the market are normal and also healthy. Investors who maintain appropriate allocations that are aligned with their long-term goals are in the best position to move forward with their plans and are less distracted by changes in market conditions, even though they may experience short-term declines in the value of their account.
We know markets are cyclical - they go up and they go down. The stock market has been rising now for over ten years with only a few significant short declines – this uptrend has lasted longer than average and we never know when, or what may trigger a market downturn. We know that our trade negotiations with China have impacted some segments of the US economy, and some economic indicators have seen some declines. Prolonged declines in the output of the US Economy (Gross Domestic Product, or GDP) can lead to a possible recession.
The biggest news item over the past few weeks has been about the spread of the coronavirus. Actions by various world leaders to address the spread of the virus are causing fears of a global slowdown which is causing markets to fall. Some countries and industries will be harder-hit than others, such as China and industries such as travel and leisure. Markets hate uncertainty more than anything, but these up-and-down cycles are normal.
The impact of the coronavirus on corporate earnings and sales, whether among U.S. Multinationals or companies headquartered elsewhere, will take a long time to sort out even if the contagion begins receding by early summer. This disease is proving to be difficult to assess, again causing some of the uncertainty that markets don’t like.
There’s simply little precedence for these types of events. The most important thing for your portfolio is to be allocated to different types of investments: stocks, bonds, cash, real estate, and other assets. While some things go down, others may not or may even go up. Your personal allocation, aligned to your long-term goals, is the best way to weather market declines and avoid missing the opportunities that inevitably arise.
The mix of investments I’ve worked with you to set up in your retirement account are balanced across US Stocks and Bonds, Real Estate, with a small exposure to International Stocks and Bonds. Any international exposure you may have, which is small compared with your overall portfolio, is mainly invested in large, well-established companies to give you have the best opportunity to wisely balance your portfolio.
With arguably the best healthcare system in the world, the US may prove to be more insulated from the effects of the coronavirus than most other regions, and your portfolio is more heavily weighted toward US companies. Among the world economies, the US has been the shining star for some time now and that is expected to be the case for the foreseeable future.
Something you may have heard me say is that when markets fall, it’s like buying things on sale. Your regular payroll contributions to your retirement account will be buying higher quantities of lower-priced investments when markets have declined, and when markets eventually rebound, you get some extra “lift” from those shares you bought on sale.
Staying invested is often the best strategy, and that is likely to remain the case. But more market volatility - in both directions - and perhaps a period of sideways market action could be in store in the months ahead.
This disease outbreak illustrates the benefits of maintaining a balanced portfolio aligned with your long-term goals. While U.S. stocks are down about 12 percent over the past week and have erased year-to-date gains, broad U.S. bond indexes are up one percent. The most popular mix of investments (a 60/40 stock/bond portfolio) is still flat to slightly negative for the year.
For anyone that may be interested, I have included some information below about how markets have performed following several epidemics over the past 40 years. I believe that looking at the market’s overall resiliency through several major epidemics can give us perspective on the benefits of investing for the long-term.
As always, I welcome hearing from you whether or not you have a concern about the current market or how it may affect your portfolio. Please email me or give me a call any time.
Sincerely,
Scott
Scott M. Lippa
Accredited Investment Fiduciary and,
Your Retirement Plan Advisor
(585) 427-0054
scott@lavorogroup.com