How Will The Coronavirus Affect Your Portfolio?
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.
Previous Health Scares
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.
What We Can Learn
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!
Maintain A Long-Term Strategy
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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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Market Street Wealth Management Advisors, LLC), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Market Street Wealth Management Advisors, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Market Street Wealth Management Advisors, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Market Street Wealth Management Advisors, LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Market Street Wealth Management Advisors, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Market Street Wealth Management Advisors, LLC’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.