Curbing Corona Chaos
March 11, 2020 | by Lena Rizkallah, JD, CRPC
While the markets continue to whipsaw and the novel Coronavirus wreaks havoc with the world economy and, almost more importantly, investors’ fears, one of CWA’s skilled advisors wrote up a blog post that I find incredibly insightful.
When the fear of the unknown drives market movements, equipping yourself with facts, statistics, and historical data can prove to be remarkably reassuring.
Enjoy the attached blog post provided by Lena Rizkallah from CWA’s Manhattan office, and don’t hesitate to share with other concerned friends or family members. We get through times like these by relying on the expertise of those around us, and we are happy to be there when you or your contacts need us.
Sick and tired of being sick and tired
Just as the hit Netflix reality show “Love is Blind” was winding down, another curious phenomenon was bubbling to the surface in the United States. The coronavirus, or COVID-19, is believed to have originated in Wuhan, China after an outbreak there in the latter part of 2019. Since the first cases in China were reported, the virus has spread globally, affecting over 100 countries including Iran, Italy and the United States.
According to the Centers for Disease Control (CDC), as of Monday March 9, there have been over 1000 cases reported and 27 deaths linked to the virus in the US. Health experts believe the virus is transmittable from person to person through liquid droplets that travel through the air or stay on surfaces. They recommend washing hands thoroughly and very often, using hand sanitizer, avoiding people who seem to be ill, and staying home from work if you feel ill. Many people are also avoiding large gatherings.
Since the first cases were reported in the US, travel and business have been affected. Airlines have reduced flights, hotels are reporting vacancies as conferences have been canceled as preventative measures to stop the virus from spreading. In New York City where millions of people live and work in close proximity to one another, many companies are offering work from home options to employees, staggered schedules which would allow employees to commute to work during non-rush hours, and are limiting non-essential travel. In Seattle, many tech companies have already allowed employees to work from home.
What does this mean to you?
With new cases being reported every day and a limited understanding of this new virus, we have compiled some helpful information about the virus that will hopefully help you manage C-virus anxiety:
- Who may be affected. While anyone can be infected, the virus is more likely to affect individuals with chronic conditions including respiratory illnesses, and the elderly. Worldwide, there have been 121,000 cases reported with about 3300 deaths, with a mortality rate hovering between 3-3.5% globally and about 1.5% globally excluding China. Health officials suspect the mortality rate to be lower than the 3.4% rate reported by the World Health Organization (WHO) since it is believed that many more people are carrying the virus but are not exhibiting symptoms. Below is a chart complied by J.P Morgan that illustrates the mortality rate of the Coronavirus across age groups in China.
- How long will it last? While the outbreak in China was relatively significant, the number of new cases reported there has gone down significantly from the peak. The J.P. Morgan chart below shows the projected increase of cases in China compared to a much lower actual number of cases, and the potential that once the virus is contained in the U.S., the number of new cases may be likewise reduced. In the US, advance warning of the virus may have allowed health officials to take preventative measures, the government has committed to funding research for treatment and a vaccine, and conditions (i.e. better air quality in the U.S. versus in China, fewer smokers here, the superior U.S. health care system in general, etc.) may be more favorable so that the disease is better contained.
- What could kill this virus? As the temperature in the northern hemisphere gets warmer it is likely that the virus may start to die off and contagion become less likely. The chart below shows how other diseases like SARS and the flu have been more likely to dissipate as temperatures rise.
- Much is still not known about this new virus and a vaccine and treatment is possibly months away, so it’s important to continue to take precautions to keep yourself and your family healthy.
The market is bumpy; should I wait it out?
With continued anxiety over the spread of the virus, the markets have been on a roller coaster ride since last week. As of Monday March 9, the markets are down 19% from its peak and heading into bear market territory. But just because the markets are down, does not mean you should pull your money out and play it safe. In fact, in times of uncertainty, individuals should review their financial plan, rebalance and adjust holdings, as well as consider tax-efficient strategies.
When it comes to understanding how or whether to participate in the market during a global outbreak like this, let history be the guide. Here are three insights to keep in mind:
- In past outbreaks, the markets got sick but then recovered. Below is a Vanguard chart that illustrates the initial market sell-off in the equity and bond markets at the onset of the SARS and Zika outbreaks respectively, the trough, and the recovery of both–often occurring within weeks or months of the trough. You can see that although it was a bumpy ride, the equity markets rebounded relatively quickly after each downturn
- Timing the market doesn’t work. Most people—along with the markets– hate uncertainty and when the markets become volatile as they have been lately, our first instinct is to pull out and move to safety (i.e. cash). The truth is, markets are supposed to go up and down and there are many factors to consider before pulling out after a strong dip in the market.
- If you’re a few years from retirement, it’s crucial that you meet with your financial advisor to ensure that your asset allocation provides opportunity for upside but also includes diversified fixed income positions that help to buffer your portfolio from the downturns. People close to retirement are especially susceptible to sequence of return risk (which can negatively impact retirement nest eggs) so be sure to work closely with your advisor to reinforce your portfolio during times of volatility.
- If you have a longer investing timeframe and have a balanced asset allocation portfolio, you may likely weather temporary downturns as most recoveries in the market have occurred very soon after a market trough. Be sure to meet with your advisor to review your plan and make any adjustments to it.
- History shows that a few bad market days doesn’t necessarily mean a down year. The J.P. Morgan chart below illustrates S&P 500 drops that occurred annually over the past 39 years, but that the annual market returns ended positively 29 times during that period. In other words, the bad news we’ve been experiencing over the past few weeks may not be here to stay. There is no guarantee that the market will rebound but history shows that it is more likely to do so.
- The best days in the market usually occur within days, weeks or months after a market bottom. The Vanguard chart below shows different outcomes for a $1 million account during the market dip in December 2018. It illustrates how the different reactions of four investors resulted in four different account values just two months after the market bottom. The investors who went to cash on Christmas Eve and New Year’s Eve 2018 respectively locked in their losses and missed out on the rally. The investor who stayed invested throughout saw his account grow almost 10% from the bottom of the market in December 2018 to the end of February 2019.
In addition to working with an advisor to build a plan and a balanced portfolio, be sure to take proactive measures: manage your spending, review your IRA accounts for opportunities to convert to Roth IRAs as asset values are lower and the tax impact of conversion may also be less significant. Also consider selling some poor-performing stocks to take advantage of tax loss harvesting.
Keep your cool but wash your hands
Like the corona virus, uncertainty doesn’t make you feel good. It’s important to stay informed about the virus and how it may impact your day-to-day life. And when it comes to investing taking the proactive steps to reinforce your portfolio—like working with a financial advisor, managing your spending and establishing a comprehensive plan and sticking with it–may help keep you safe when the market is unwell.
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