Global stock markets are roiling over the coronavirus. The MSCI EAFE Index – one measure of global stocks – is down 10.6% as of Friday, March 6. While here in the U.S. the S&P 500 index is down 7.7% as of last weeks close. Many investors are left wondering what to do now? Should they sell and wait out the storm? Or hold on and ride out the panic? This all reminds me of the popular song by the Clash – Should I Stay or Should I Go Now? The "indecision's bugging me!" If you are in this predicament, here to help, are my thoughts from my twenty years of managing money for clients:
Extra! Extra! Read All About It
News of the coronavirus is likely to continue at a fast and furious pace in the days and weeks ahead. While the media will most likely focus on the numbers and some individual cases, both deserving of attention, it is also important to listen to the medical experts closely tracking the virus to form a more widespread perspective. For example, the CDC estimates up to 61,000 Americans die annually from seasonal flu complications.1 While the coronavirus is responsible for approximately 22 deaths as of Monday according to one New York Times report.2
Some Sectors Will Feel More Pain
The leisure, travel, recreation, airline, and hospitality sectors could stand to get hit hard the most as business travel and tourism slows. Emerging market economies may slip into a recession if global demand continues to weaken. Gold has surged, but it may not be wise to sell equities at a low and buy gold now at a higher price. This is why investors need to be as broadly diversified to begin with, before the market downturn.
While Other Sectors May Hold Up Better
Healthcare stocks had a good week last week, up 5%. Consumer staples – manufacturers of toothpaste and hand soap for instance - were up 6% last week. Utility stocks for the most part are doing well. These three sectors according to Fidelity tend to hold up better during economic slowdowns.3
Looking Back at Past Epidemics
The following chart shows how the stock market fared in past epidemics. In the one month after an outbreak, for the most part world markets suffer. However, in the three and six months following the outbreak, global stock markets tend to recover. While history does not it repeat itself, it often rhymes. Market downturns caused by epidemics may only be short-term.
What To Do?
My hunch is this is not a 2008-09 financial crisis. Banks are in better shape than in years past. Plus, this is an election year. My guess is Mr. Trump will do everything in his power to NOT make this his Hurricane Katrina. For my clients, we do a stress test. We run their investments through a down market simulation to see how their portfolio held up in past market crashes. This helps investors see the potential impact of a market downturn on their nest egg. It also helps us gauge whether the risk we are taking is appropriate.
We also perform a stock sector analysis, to see if the client is overweight or underweight any one area of the market. Being overweight the wrong sectors can hurt. Now could also be a good time for tax-loss harvesting. If you sell a position with a loss, you can use that loss against other gains in the portfolio. This may come in useful later in the year if the market recovers. To avoid the wash-sale rule, don’t buy the same position back within 30 days.
Whatever you decide to do, be careful about making changes unless you fully understand the implications. This is why it's best to talk with a professional first. Personally, I wouldn't make wholesale changes to a properly designed portfolio right now unless you really needed the money. Or as they say, if you can't stand the heat, you probably shouldn't be in the kitchen in the first place or the market.
For more information or if you'd like to see how your portfolio would hold up in past pandemics, please feel free to email me at firstname.lastname@example.org. I always welcome questions and comments from readers.
Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC in Stratford, CT.
Investment advisory and financial planning services are offered through Summit Financial, LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken. Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.
The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
1. “Disease Burden of Influenza,” Centers for Disease Control and Prevention, accessed 02/27/2020 online.
2."In US, Cases of Coronvirus Cross 500, and Deaths Rise to 22,” The New York Times, March 8, 2020.
3. "Comparing Sector Characteristics" Retrieved from Fidelity.com