At Market Street, we do not believe in speculating or market timing. We base our asset allocations and investment recommendations on long-term historical analysis which can be supported by evidence-based research. We realize you probably have a lot of questions about the recent Coronavirus (COVID-19) outbreak and what impact it will have on your portfolio and global health in general.
Since I'm not an epidemiologist, I will refrain from providing any detailed context on the virus itself. However, I do believe I can help ease some fears by looking at other modern-day epidemics and the corresponding impact they had on the markets. While we believe this virus will have a limited impact on your long-term portfolio, we understand that these health scares can have a significant toll on those affected by the virus.
Since January 2003, we have had six global health scares. These include SARS (2003), Avian Influenza (Bird Flu, 2006), Swine Flu (2009), MERS (2013), Ebola (2014), and the Zika Virus (2016). The S&P 500 market corrections for each of these epidemics ranged from -5.8% (Ebola) to -12.9% (Zika). These drawdowns can vary slightly depending on the date ranges used to identify the start and peak of the viruses.
For the purposes of this article, I have assumed the drawdowns are a direct result of the underlying viruses and not some other external or market force in play at that time. The benefit of hindsight is that you can see exactly how the events unfolded and apply that lens to how the markets may behave with future epidemics.
The most fascinating discovery is how the markets tend to bottom right before the peak outbreak period. Furthermore, the market bottom tends to be followed by a steep V-shape recovery (sharp drawdown with a proceeding rapid recovery) as the outbreak begins to wind down. None of the previous occurrences led to long-term market disruptions nor did they initiate an economic recession.
The chart below from Dow Jones Market Data shows how the Dow Jones performed from the end of an epidemic over the corresponding 6-month and 12-month periods:
Ebola was the deadliest modern-day epidemic we have faced with 28,500 cases and 11,300 deaths for a mortality rate of 40% while SARS resulted in 8,100 cases and 774 deaths. As of the time of this writing, we have seen 77,600 cases of the Coronavirus and 2,600 deaths. By comparison, the seasonal flu impacts 9-40 million people per year and caused an estimated 80,000 deaths in 2018!
If we use these prior epidemics as evidence on what to expect going forward, you shouldn’t need to worry about the long-term impact on your portfolio. As we saw in the market yesterday, it is likely that we will continue to see short-term volatility until the current outbreak peaks and starts to level off. We will take these opportunities to proactively harvest losses and rebalance your portfolio back to target as our long-term investment philosophy calls for. During these periods of uncertainty, we will trust the process and allow the historical context to continue to drive our long-term decisions.
Please let us know if you have any questions. We look forward to hearing from you!
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