The world is watching with concern on the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond. The large market movements through the end of February unnerved investors around the world.
We believe that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happen when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Many companies have announced expectations of reduced revenues as a result of problems related to the making and selling of products in China. World leaders have said the virus will likely become a global pandemic and they have warned of a serious blow to their respective country’s economy. Individuals in the U.S. have started stocking up on food, water and toilet paper as evidenced by shortages at local Costcos and other stores. These are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns in the future. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
At CCMI, we are focused on helping investors develop a long-term plan they can stick with in a variety of conditions. CCMI’s CERTIFIED FINANCIAL PLANNERTM professionals are trained to consider a wide range of possible outcomes, both good and bad, when helping clients establish an asset allocation and plan. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.
Have a concern about your portfolio? Please give the CCMI team a call to see how we can help.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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