FinSyn Insights

Weekly insights on the markets, economy, and financial planning

Coronavirus and Market Contagion

The coronavirus continues to impact the global stock markets negatively, and today was particularly gruesome. The Dow Jones Industrial Average dropped more than a 1,000 points (-3.56%). Just an unusually ugly day in the market by any measure of comparison.

Fears about coronavirus contagion rattled investors after a surge of cases outside China were reported over the weekend, prompting concerns about new pockets of infection in Italy, Iran, and South Korea.

The epidemic, which has curtailed Chinese manufacturing, exports and consumption this year, is threatening to dampen global growth as factories world-wide depend on a supply chain tethered to China.

When this ends or what the ultimate outcome will be is anyone’s guess. Should we “do something” in the portfolios in reaction to this virus outbreak? No, nothing more than we’ve already done in the construction of a globally diversified portfolio. These sharp downturns in the market are not fun, but reacting to these short-term events by making moves in the portfolio will inevitably lead to even worse results over the long-term.

When the “you know what” hits the fan in the markets, I’m always reminded of one of my favorite quotes:

“History Doesn’t Repeat Itself, but it Often Rhymes”

I’ve found this to be true about the stock market almost every year. The quote is attributed to Mark Twain, although there was never 100% proof he actually said it.

We don’t have to look back in time very far to find a significant market downturn. It’s pretty much an annual occurrence, in varying degrees. Let’s revisit the 4th quarter of 2018. That was truly brutal.

Market Meltdown 4th Quarter 2018

From September 20th to December 24th, the S&P 500 plummeted -20%. What was the cause of this drop? Take your pick:

  • The Fed was increasing short-term rates and this would tank the economy.
  • Inflation is just beginning to creep in after a long recovery: This signals an overheating economy.
  • Company earnings are unsustainable and cannot continue much longer.

I wrote an article on this topic (along with several others) in the midst of the 2018 market meltdown: Investing in the Bizarro World

And guess what, none of these things actually tanked the economy. In fact, from Christmas Eve 2018 through the end of 2019, the market was on fire returning more than 37%.

2019 Performance

Now, I know that part of that was certainly a bottom bounce from a 20% drop, but it’s still pretty impressive. Who would’ve thought coming off that horrific 4th quarter in 2018 that 2019 would produce one of the best stock market performances in recent history? From the market bottom on December 24th 2018, that level was never tested again.

The point is, global market conditions can turn on a dime. This coronavirus situation could drag on for a bit, or we may not even be talking about it next month. We just can’t let these short-term (and sometimes traumatic) events derail our long-term financial plans.

There’s much we cannot control when it comes to investing. Luckily, however, we can control how we react to uncontrollable events.

Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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