With coronavirus as catalyst, the last two trading days have seen a sharp drop in stock prices — the Dow Jones Industrial Average fell over 1,000 points on Monday and over 800 today. This understandably has created fearful headlines and growing unease. While not dismissing the seriousness of the coronavirus outbreak nor the likely impact to global economies, maintaining perspective in times of market volatility is key. A few very brief observations may be helpful:
- Percentages vs. points: points are dramatic, but percentages are more meaningful. With the Dow trading at approximately 29,000 to open the week, 1,000 points equates to roughly 3.4%.
- It might surprise you to know that a daily drop of 3% or more is not unusual, occurring once in 2019, five times in 2018, six times in 2011, and five in 2010. The drops tend to be clustered, as we’ve seen this week.
- In other words, this level of volatility is not an isolated nor uncommon occurrence.
- And interestingly, on average, one year after a drop of 3% or more in the S&P 500 (a broader market barometer than the Dow), the index is nearly 13% higher.
That said, it’s important to be realistic and repeat that the coronavirus is a real and distressing global event, and the path of the outbreak is unpredictable. At this juncture, China’s economy is likely to see the largest impact, although the effects will broaden as cases are reported in other countries. There will clearly be impacts to overall first quarter global growth, and effects could well linger depending on events. Supply chains have been disrupted, global travel has declined, and many corporations will experience declining demand. News reports today suggest a vaccine is still months away. The clarity of resolution that all would like just is not here yet, and financial markets will continue to react to changing information.
So, while the situation remains very fluid, it is important to remember that uncertainty should not disrupt long-term planning. We are not experts in public health or infectious disease, so we cannot speak to the medical side of this equation. However, we are keen observers of market history. As such, we strive to maintain balance and consistency of plans for all our clients because we know that reacting to short-run volatility typically torpedoes long-term success — no matter how frightening the cause of that volatility. Diversified portfolio construction is vitally important — for example, while stock prices have declined, bond prices have increased. Diversification works! We are secure in the grounded knowledge that even in the case of severe market disruptions, patient adherence to well-conceived plans leads to success.
As always, please reach out to your service team if you desire further discussion. We are gratified by your trust and confidence and remain available to address any questions or concerns you may have.