Monday, March 2, 2020

Things to Remember During Current Market Events

Well, things escalated quickly.

The world is watching as more information comes out on the spread of coronavirus, and financial markets took notice. As of Friday’s close both the S&P 500 (large US stocks) and the Russell 2000 (small US stocks) declined over 12% from their highs. We saw similar declines across the world. 

While it’s impossible to name one exact reason for stock market declines, it’s obvious the impact of the coronavirus is being priced in. 

So, what does this mean for our portfolios? What should we do?

1. Remember that markets are absorbing all known information.

This is what’s actually happening. This is why stock prices are declining in value. Each day, investors all over the world are incorporating all known information into the prices of these investments – this is how financial markets work.

Owning stocks – shares of businesses – means you own a right to the future earnings of those businesses. If earnings are expected to go up in the near future, you would likely pay more for a business (price goes up). If you expect earnings to go down in the near future, you would pay less for a business.  

It seems logical that coronavirus is causing, and will likely cause, lower earnings for businesses in the near future. People are staying home. Manufacturers are adjusting production. People aren’t buying or travelling as much. Tourist destinations, schools, stores, and churches are closed. And we don’t know how long this will last.

In light of that, it seems logical that prices should decline. There’s more uncertainty about future earnings of businesses worldwide. However, this risk of short-term declines is a part of business ownership. It’s the price we pay for higher long-term expected returns. 

This also means we don’t have information to take advantage of yet. We can’t time markets or make serious trading decisions based on recent news – it’s already baked into stock prices. 

2. Remember your financial plan and time horizon.

It’s completely natural to be concerned or anxious during quick declines and news of spreading sickness. The important part is how we react. 

Your financial plan and time horizon should guide your decisions. Remember the goals you set for your investments. It’s in light of these goals that you selected your long-term mix of stocks, bonds, real estate, etc. Your investment plan should change based on the changes in your goals and life, not on short-term market swings. 

Are you investing for 10, 20, or 30+ years? If so, this will be a blip on the radar. Your concern is the returns over the coming decades, rather than the coming weeks. In fact, the investments you’ve been buying have suddenly gone on sale! It’s a bargain, and your future self will thank you for staying invested. 

3. Remember that this is considered….normal?

That’s right, stocks have declined over 12% and we would consider this a normal year. 

How so? 

As JP Morgan shows in their annual Guide to the Markets, the S&P 500 had positive returns 30 of the last 40 years. However, there was an average decline within each year of 13.8%. We should expect that, at some point within each year for whatever variety of reasons, there will be a decline in stock prices. 


The most recent major decline was the end of 2018 (20%!), and that’s likely been long forgotten by most of us. 

That doesn’t make this easier to stomach. But it should help to know what we’re seeing now is par for the course, historically. There is risk with owning stocks. Again, that’s that short-term cost we pay for higher longer-term expected returns.

4. Remember that you may own bonds.

If you’re closer or into retirement, or nearing any financial goal, it’s likely you own bonds in your portfolio. Recent events are a great example of why diversification is important, as there’s a good chance those bonds have increased in value. 

This is the ballast of your portfolio – the point of stability. You can rely on these relatively stable bonds during times of stock declines and allow your stocks to recover. You can also use bonds to rebalance into stocks, if it makes sense.

5. Remember that markets reward discipline.

It’s not easy to go through times like this, but markets have always rewarded those who are patient and disciplined over long periods of time. 

As we can see from the graph below, there have always been reasons to panic and run. We’ve seen an oil crisis, conflicts overseas, political turmoil, a tech bubble, and a Great Recession. We’ve seen the spread of other diseases. Before all of that, we saw two World Wars and a Great Depression. 

Through all of that, those who are able to work through the fear and remain invested were rewarded with long-term market returns. This is the outlook we maintain – “this too shall pass.”

What to do

What are we doing during this time?

We are not making material changes to investment portfolios. We’re monitoring the situation, and looking for opportunities to rebalance. That is, sell the investments that have gone higher than we target in our allocations (for example, bonds), and buy the things that have gone lower (for example, stocks). This is systematically selling high and buying low.

Keeping a long-term outlook and maintaining discipline through anxious times is difficult. But we believe in long-term investment in businesses worldwide and human ingenuity. We don’t know how much further stock prices decline or how long before the new virus feels contained. We don’t know how the upcoming presidential election ends. 

The good news is we don’t need to - we know businesses will respond. They’ll trim costs, reevaluate supply and manufacturing chains, improve their processes for similar events. 

Our long-term outlook is one of positivity, and those able to maintain their discipline will be rewarded over time. 

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

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