Coronavirus infects financial markets

Recent news about the coronavirus outbreak is tragic, with unimaginable and unmeasurable implications for the many affected. As we attempt to discern incoming economic data, our goal is not to diminish the harsh realities faced by those affected, but to keep in mind that there are economic impacts on investors and to make sense of a market environment that reacts in real time to public health emergencies.

What’s happening?

Global equity markets sold off sharply today following reports over the weekend that coronavirus infections are spreading outside of China at an alarming rate.

The global demand shock will be hard to quantify for some time as the scope of the social and economic impacts in affected countries remains fluid. Governments are trying to balance the need to provide the public with information against the risk of causing panic.

We are observing confusion among governments and policymakers, which is spurring risk-off behavior among investors. Yesterday, U.S. Treasury Secretary Steven Mnuchin told reporters that policymakers would explore options to respond to coronavirus. We think elevated levels of two-way volatility will follow today’s initial reaction to the spreading of the virus. Therefore, we caution investors against reacting to these acute price moves.

Bigger picture

While the economic effects of the outbreak are difficult to quantify, we believe that stocks are reflecting late-cycle market dynamics associated with slowing economic growth. We have alluded to the emergence of these risks in previous client communications. Investors who shared that stance are likely weathering recent volatility better than those betting on the global growth acceleration narrative in late 2019.

What we expect

It’s likely that we’ll continue to see elevated volatility as investors speculate on the potential economic impacts of coronavirus. We would remind investors that global growth was already slowing before its emergence. Therefore, we view the economic consequences of coronavirus as a mechanism of pulling forward late-cycle dynamics. Given the fluidity of the situation, we favor adhering to a disciplined long-term investment strategy.

The chart below shows a number of incidents over the past 10 years that some people considered reasons to sell stock investments. However, the big picture shows that the S&P500 rose 495% over that time period. (Click to see a larger view)

What does that mean?

Largely, following a long-term investment strategy means focusing on the forest, not the trees. As the market goes up and down, it’s easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of short-term price fluctuations on your portfolio.

And remember that a down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity to buy shares of stock at lower prices. Legendary investor Warren Buffett recently reported that he was a net buyer of stocks for the moment—despite coronavirus fears–and that he still recommends buying stocks over the long term.

The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and talk to an Azzad advisor when you need advice along the way.