Coronavirus: What to do about stock volatility

COVID-19 is worrisome to stocks, but your diversified investment portfolio will likely be fine.

Fears surrounding the spread of a novel coronavirus and its resulting disease, COVID-19, have caused significant market volatility. The S&P 500 Index* is down by double-digit amounts since last fall. And, uncertainty about COVID-19 containment continues.

Let’s consider some facts.

At the time of this writing, global infections exceeded 118,000, leading to 4,262 deaths, according to Johns Hopkins University. Approximately 80% of known cases are in China. The mortality rate there is 3.6% overall.

In comparison, the common seasonal flu takes 12,000 to 61,000 lives in the United States each year, according to the Centers for Disease Control and Prevention. The quality of the U.S. healthcare system and public awareness will greatly increase the odds of containment of COVID-19 here in the U.S., in my view.

What should you do? 

For most people, the best thing they can do is “stay the course.” Simple to say, but not always easy to do.  Here are some things to consider.

4 reasons to stay the course

1. Perspective – Recognize the medias role.

It’s now impossible to read a newspaper or watch the news without multiple references to the coronavirus. The media has a “crisis bias.” Their product is news, and the more exciting or scary the news is the better their product does. They clearly benefit if the coronavirus is top of mind for you because you will likely keep tuning in. 

Expect the media to continue gleefully reporting the expanding number of infected and fatalities around the globe, because that is the role they play in today’s world. 

Understanding the media’s role helps give you some perspective. The odds of you or any one you know becoming seriously ill from the coronavirus is extremely low.

“For most of the American public, who are unlikely to be exposed to this virus at this time, the immediate health risk from COVID-19 is considered low,” says the CDC

Also, keep in mind the stock market reaction isn’t based upon the coronavirus killing tens to hundreds of thousands of people. The stock market is going down because there is a cost to containing the virus in the form of global supply chain disruptions and lower corporate earnings. 

2. Stock prices dropped as expected.

Second, the stock market was already looking for a catalyst to revalue prices. For several years now, stocks have shown lower-than-average volatility and higher-than-average returns. Valuations were stretched, in my opinion, and the market needed a catalyst to spur on a correction. That was found in the coronavirus. 

Past virus outbreaks have caused shocks to the market in the short-term, but typically have recovered within months. So, stock market buyers will come back when the prices become attractive to them again.

3. Sell-offs lead to recoveries.

Third, it’s easy to be disturbed during market sell-offs. An index like the Dow might be down by 1,000 points in one day, but please remember that 1,000 points is only approximately 4%  — and a 4% drop is not that uncommon. 

My favorite example is Black Monday. On October 19, 1987, the stock market crashed 21% … IN ONE DAY! That one-day loss was tough to swallow at the time, but the market recovered and ended 5% up for the year. 

Interestingly, I have not received many calls from clients during this coronavirus scare. Those who have called have typically asked whether this is a buying opportunity. It may be for some of you. Valuations have been adjusted. The sell-off, if anything, may have made the market healthy again. 

4. The economy remains solid.

Fourth, the fundamentals of our economy are still solid: 

  1. Record low unemployment
  2. Low interest rates
  3. Strong housing market
  4. The bond market is up — So, it’s not all doom and gloom.

As the market has fallen in 2020, core bonds have provided a strong ballast for client portfolios — diversification is paying off right now because while stock prices are declining, bond prices are rising. 

Now is an opportunity to do some financial planning to make sure your portfolio can weather future storms. 

What am I paying attention to?

Interest rates: It’s also important to note that the Federal Reserve Board is on top of it. Last week, the Fed lowered the target the federal fund by 0.5%. “The fundamentals of the U.S. economy remain strong,” the Federal Open Market Committee said in a prepared statement.

Ways to mitigate fear: Keep the news in perspective. There is no question the coronavirus will impact corporate earnings, but much of the current sell off is a simple “flight to quality” where investors sell higher risk assets during times of turmoil and flee to safer, less volatile assets … typically bonds. That’s not indicative of underlying problems with corporate and economic fundamentals. Also remember, there is “the stock market” that the news outlets talk about. And, then there is “your market.” The two are most likely not the same. 

Asset allocations: I want my clients to focus on having the right asset allocation given their time frames and goals. Stock market declines are OK, even expected, what we strive to avoid is pulling out large chunks of money from stock funds WHILE the market is declining. That’s where asset diversification comes in, providing less volatile assets (like bonds) to satisfy income needs or to stabilize a portfolio. 

My financial planning advice is to stay the course, and maybe think about some rebalancing “around the edges” — to add some equity exposure on weakness where appropriate. 

Historically, these sharp volatile sell-offs tend to become overbaked, often providing excellent buying opportunities. 

For now, uncertainty remains high, so I will keep on eye on the situation. In the meantime, my our heart goes out to any of you who have been affected personally by the coronavirus outbreak.

* The S&P 500 (Standard & Poor’s 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average (the Dow) is a price-weighted index of 30 actively traded blue-chip stocks. Indexes are unmanaged and cannot be invested into directly.

Adam Hartrum is a registered representative with, and securities and advisory services offered through, LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.