Recently, we’ve seen increased volatility in the stock market—which basically means ups and downs in stock prices. This volatility has been primarily attributed to concerns about the impact of novel coronavirus (COVID-19) on global economies.
While COVID-19 is likely driving some market movement, there are other things going on around the world too—such as economic slowdowns in some international economies and the U.S. presidential primaries. These events each have the potential to impact the market and may also interact with one another in complex ways. It can be difficult to fully disentangle what exactly is driving market changes from one day to the next.
We’d like to put recent market movements into a more informed perspective for investors by comparing recent events to the historical record.
How Outbreaks Affect The Stock Market
In general, infectious disease outbreaks tend to have a temporary impact on economies and markets. Think about the containment measures that are quickly put into place. It’s highly unlikely that quarantines or travel restrictions will last forever. While they might slow down economic growth, they tend to be temporary in nature.
Historically, outbreaks have had a temporary drag on economic growth. Financial markets have reacted abruptly as fears swelled and economic forecasts were revised. However, the impact on both economies and markets tends to be short-lived.
Let’s look at the past 50 years. In almost all cases, U.S. markets were already up within six months after the emergence of a new infectious disease outbreak. The same is true of global markets during the same period, which actually saw an average of 8% growth over those same six months.
If we look directly at the impact of SARS on Chinese economic growth, we saw that GDP dragged by roughly 2% following the SARS outbreak. Yet, it was back to pre-outbreak levels within—you guessed it—six months.
Could this time be different?
There are still a number of unknowns when it comes to COVID-19, so the impact of this particular outbreak is by no means certain.
World economies are more interconnected than ever. China, the epicenter of this outbreak, plays a large part in our global supply chain. We still do not know if or how it might spread across the globe, nor do we know how well countries are prepared or how they will be affected. We also don’t fully know how this outbreak might exacerbate other risks throughout the economy.
But, if we use the past as a guide, we can see that the market impact from previous infectious disease outbreaks tended to be temporary.
What Investors Should Do
One of the most important things an investor can do in the face of market uncertainty is to make sure that any investment portfolios are at the right risk level.
If your investment timeline is on the shorter side, your portfolio should already be at a low level of risk. This helps insulate you from market volatility—whether it’s related to disease outbreaks or otherwise. If your investment timeline is longer term, the best course of action is likely to just remain at the appropriate risk level and not make any fear-based changes.
Plus, you never know when the market is going to have a good day. Between 1993 and 2013, the S&P 500 had an annual return of 9.2%. But, if you had missed just the ten best market days during that time period, your annual returns would have dropped to roughly half, or 5.4%. If the market is going to have a good day, then you want to be there for it—not sitting out on the sidelines.
It can be easy to get swept away by worrisome financial news headlines. Take care in how you read and interpret news to make sure you’re doing what’s best for your investments. The best path to long-term investing success is by taking the right amount of risk for your goals, saving, and sticking to your plan.