The coronavirus has officially been named a pandemic by the CDC as it has spread from China to the rest of the world, including the US. At Prosperity, we are actively watching the market reaction and our clients’ portfolios. We will continue to monitor the outbreak and communicate with you as events unfold.
Is the Coronavirus Different?
Many clients ask us this question and in short, the answer is yes. Each challenge that our country and economy have faced has been unique and different from the previous challenges in some way. However, when an event such as the coronavirus pandemic impacts our business environment, our economy, stocks, travel plans, and most importantly, our health, it’s important to stay calm and take the time to understand the issue and the systems in place to protect us.
Lessons From History
Although this is different from previous epidemics and pandemics, history still has valuable lessons for us.
We have been riding a market high for the majority of the past 11 years. We have entered a bear market as the S&P 500 saw a 26.7% decline from all-time highs in just 16 trading days. The immediate social and economic repercussions of this have been felt as we see oil prices drop, stores run low on toilet paper and our communities left with a sense of fear and unease.
However, looking at historical market drawbacks of this magnitude and speed, we have seen impressive recoveries in the past.
In the chart above, in orange, you can see the instances of a greater than 25% price decline over a 2-month period. In blue, you can see the S&P 500 return a year after a greater than 25% pullback over a 2-month period.
Rapid 25% market drops are not unprecedented and usually follow substantial recoveries within 12 months. Since 1940, the S&P 500 has declined by 25% over a 2-month period 67 times. The 12-month recoveries averaged 17% and 12-month price returns were positive in all 67 periods.
Opportunities in Bear Markets
Entering a bear market after a long bull market may be emotionally difficult. However, if we look at history, bear markets tend to be short and followed by longer periods of market growth.
The chart above represents historical data in the S&P 500 index. The dark tan shows us bear markets while the light tan shows us growth and recovery periods.
The most recent bear market was the debt crisis in 2008. It was also a unique event, unlike anything that happened previously in the market. For many long-term investors, it created opportunities as they were able to purchase investments at much lower price points.
If you’re interested in discussing opportunities in the current bear market, please reach out to your advisor.
What If You’re Near or at Retirement?
At Prosperity, your investment portfolio takes into account your age, risk tolerance and your proximity to retirement. The asset allocation models we have in place for you factor in the possibility of volatility in the markets. Many of our clients that are at or near retirement have a significant portion of their investments in bonds that are less sensitive to market fluctuations.
Flattening the Curve
In China, where the virus started, cases are past their peak and are currently on the decline.
In the US, as cases are still increasing, we can expect the curve to flatten as stricter measures are imposed by our local and national governments to keep us safe.
As coronavirus runs its course, it’s important that we all listen to our leaders and wash our hands, keep a distance from others and stay home and seek medical care if we’re feeling sick. By following these precautions, we help contain the spread of the virus and its impact on our economy.
We’re Here for You
We are available to discuss the markets and your portfolio with you. To get in touch with us, you can send us a note below or call us at (410) 363-7211. We look forward to your questions.
In the meantime, let’s focus on taking this manner seriously and taking care of our health and well-being.
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