Since World War II, there have been many epidemics. The two most recent occurred in 2003 when all the headlines contained the word SARS, and at the end of 2015 with the outbreak of the Zika virus.
During those two most recent outbreaks, the market fell approximately 13% over a short period of time.
In these cases, we either solved problems or simply learned to live with them, just as we had done with similar “emergencies” in the past. Life moved on.
Like all other epidemics before those, the market not only recovered, but went on to all-time highs and eventually to levels that nobody could have even imagined!
When World War II ended in 1945, the standard and Poor’s 500 index stood at 15.84. Today even after several days of significant declines, that same index stands above 3000 - almost 190 times higher.
Along with the fantastic increase in price for the index, the dividends have risen from $0.66 in September of 1945 to $58.74 at the end of January 2020. That’s a nearly 90-fold increase!
All over a period that included epidemics, wars, stock market crashes, financial crises… you name it.
I’m not telling you that the current apocalypse du jour is over. It could certainly get worse, much worse, before it gets better.
But suppose you have a million dollar portfolio that represents broad ownership of the world stock market, and become concerned when the stock market suddenly declines by 10% after the beginning of an epidemic. You decide to sell because you’re afraid it will get much worse. So you sell your portfolio and take a $100,000 loss – leaving you with $900,000.
Now let’s suppose you are wrong, and the market suddenly turns around as quickly as it went down, something that happens frequently. Suddenly everyone says the coast is clear, which means, of course, stock prices already reflect that and have already increased in price by 10%-11%, and the stock market never looks back (the market never falls back to those levels where you sold).
You suddenly realize you made a mistake by panicking out and now need to repurchase the stock portfolio. If you had just stayed the course your portfolio would be back to its original value or close to it. The difference between your portfolio, at $900,000, and the $1,000,000 it should be, is a $100,000 loss never to be recovered.
I have seen this strategy fail time and time again. You tried to side-step a temporary decline and created a permanent loss. I don’t think enough people think of it this way.
More worrisome than the virus itself is the worldwide spread of panic as governments continue to respond with extreme measures and the media continues its own form of hysteria. As of just a day ago, there have been fewer than 3,000 deaths from coronavirus around the globe. Considering the 25,000 to 69,000 Americans who die from the flu each year, for now at least, it seems we have nothing to fear but fear itself as FDR once said.
The best answer I can give a client that asks whether they should change their portfolio due to the recent epidemic (and the prospects of it becoming worse) is, “you don’t want to do that.”
The outbreak may get worse before it gets better, along with the stock market decline. But history clearly shows us that every emergency we have faced was either solved or we learned to live with it. This, too, shall pass. In 2003, SARS was more deadly than the coronavirus (though it appears the coronavirus is more contagious), and by the end of 2003, the Dow Jones Industrial Average stood around 10,000. As it did back in 2003, the permanent uptrend will inevitably reassert itself as it has always done.
Disclaimer: This blog is for illustrative purposes only. Past performance is not indicative of future results. The information contained in this report has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. An index is unmanaged and does not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index. All returns reflect the reinvestment of dividends and other income.
Paul A. Ruedi has been serving people as a financial advisor and retirement planner for over 36 years. In 2014, he founded Ruedi Wealth Management, and currently serves as CEO.
Paul has shared his knowledge on financial issues as the host of Paul Ruedi’s “On the Money” Radio show on Newstalk 1400 WDWS for over 25 years. He has provided his insight for publications such as the Wall Street Journal, Forbes, US News and World Report, Investor’s Business Daily, and Investopedia.