When it comes to your portfolios, history has proven that even as we take heed of a serious virus spreading westward from the Far East, it is never a time to panic, even as the U.S. equity markets have seen a slight down tick in trading as investors keep watch on a deadly flu outbreak emanating from China.
But if history is any indication, and what else do we really have to go on, it’s important to take into account that back when other infectious diseases, such as SARS, Ebola and the avian flu were wreaking havoc, Wall Street appeared to remain immune. Therefore, the popular thinking is that a stock market that closed out 2019 with the best annual return in years will likely not feel any ill-effects from recent headlines.
Still, according to a recent piece on the financial website “Market Watch,” many investors are recommending caution. “Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons,” said Seema Shah, chief strategist at Principal Global Investors, in a research note, referring to the theory for the impact of unexpected events on markets and economies, popularized by Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable. The strategist goes on to say that a social-media driven news cycle, the interconnectedness of global supply chains and a pricey stock market, make Wall Street more vulnerable to a black swan. “External shocks can derail economic trends and abruptly alter market sentiment. Not all risk is economic policy or monetary,” wrote David Kotok, chairman and CIO at money manager Cumberland Advisors, in a recent research note.
On January 24 of this year, the Dow Jones Industrial Average DJIA, -1.35%, the S&P 500 index SPX, -1.34% and the Nasdaq Composite Index COMP, -1.66% ended the day and week lower and stocks were turning sharply lower early Monday, January 27.
It is important to remember that historically Wall Street’s reaction to such outbreaks and quickly spreading diseases is often short-lived. According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76% (see table below):
Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus — a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12-month period.
Data are similar for equity performance across the globe based on data from Charles Schwab, tracking the MSCI All Countries World Index 892400, -0.43%. The index has gained an average 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later (see graphic below):
“Market Watch” goes on to further explain that the severity of the virus, ultimately, will dictate the market’s reaction and just because indexes had managed to shrug off the contagion from outbreaks in the past doesn’t mean that will be the case this time. For example, coronavirus comes during the important Lunar New Year, when Asia tends to see peak travel and consumer spending. As of Friday, January 24, Beijing had shut down parts of the Great Wall, as well as 16 cities, restricting movement of some 46 million people, and canceling many events related to the Lunar New Year.
Our conclusion is it that it may be possible for the coronavirus to spread quickly within and beyond China, which may cause economic and market damage. However, investors need to understand that we cannot draw certain conclusions about anything that may affect stock-market performance. This includes pandemics. Equity markets are random and unpredictable, and such events should not be examined in a vacuum. Our unyielding coaching advice: It is never a good time to panic or attempt to time the market!
Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at firstname.lastname@example.org. Look for Robert’s new book “Investing – Without the Bull” coming out this spring.