Over the past week, the stock market saw some of the heaviest selling in over two years. When the market has several days of steep declines, it can make investors very uncomfortable. The best advice for investors during market turbulence is to take a deep breath and keep things in perspective.
The financial press tells us the selloff this week was the result of the Wuhan Coronavirus. Although the Coronavirus has been in the news for the better part of two months, it didn’t seem to be impacting the market at all until a few days ago. To understand the possible impact of this virus, think about other viruses we’ve seen in the recent past.
The world has seen many epidemics over the past two decades. From SARS and the bird flu, to the swine flu and Ebola, many diseases have threatened to wreak havoc. All of these were terrible diseases, leaving thousands dead and millions more fearing a pandemic. Despite the human toll, they all passed, and the markets eventually continued to new highs. Long-term investors who had the presence of mind to remain fully invested were ultimately rewarded.
Rational investors would expect healthcare stocks to be driven higher by fears of a global pandemic. Companies that make drugs, operate hospitals, and build medical devices would all see higher sales. In fact, the healthcare sector has seen the same declines as the rest of the market. At times, especially during market selloffs, market participants behave irrationally.
Students of the market know that 5% selloffs happen about three times per year. The market averages one 10% drop per year. Even after Monday and Tuesday’s sell-off, the market was still higher than it was six months ago. Despite the 6% drop in the first two days of the week, the market closed higher on Tuesday than it was a year ago.
More importantly for long-term investors, a few days of market turbulence don’t change the economic fundamentals. Unemployment remains at historic lows. Inflation is muted, advances in technology continue, and the American consumer will keep spending money. As long as consumers continue to spend, American businesses will continue to profit, and investors will ultimately reap the rewards.
There’s always something in the news that feels like a reason to not own stocks. Last year, it was the inverted yield curve and fear of recession. The year before, it was tariffs and trade wars. Before that, Brexit, the Greek debt crisis, the global financial crisis, September 11th, and the tech wreck all gave investors excuses to sell what they owned and not buy stocks.
In every case, investors who sold because of the “bad news” lost out. Investors who held on were rewarded. A few investors bought more, when everyone else was afraid to buy, and they profited handsomely. For long term investors, the best course of action is to stay the course and not make emotional decisions.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer