March 9, 2020
It is a surprise to few to hear that we are experiencing a period of great volatility. As of the time of this writing, the market (Dow Jones) is down approximately 18% since its recent record high just under a month ago. The fascinating part is that even though the point-to-point date range gives us the -18% number, there were two separate occasions during that time where the market still saw increases of around 8% and 5%. With most of that movement happening within just the past two weeks, you’re looking at the literal definition of “volatility.”
So what is the root cause of all of this? Uncertainty. Simply, equity markets react quite unpredictably to the unknown. There are certainly identifiable concerns with relevance; most notably, the interconnectedness of global supply chains as well as China’s share in the world economy (which has nearly doubled since the early 2000’s). But all of that still boils down to uncertainty. We can define the objective concerns that exist… we just can’t identify the extent to which they will be impacted.
While the ultimate severity of the Coronavirus is yet to be known, historically Wall Street’s reaction to health-related outbreaks is often short-lived. On average it takes about 3-6 months for returns to turn positive and within 12 months will again be back in line with historic average annual returns. Even removing the existence of this “black swan” event, a market correction of 10-20% occurs approximately every two years… and will recover within four months. (If you recall we saw quite a decline to end 2018 that was all but recovered by April 2019).
Our outlook going forward is to expect some continued turbulence as the market looks for a “bottom” to the uncertainty. In the interim, do what you can to limit exposure to many of the sensationalized headlines suggesting audacious actions, as doing so often just results in locked-in losses. We do everything we do with a strategic, long-term focus and are not making reactive decisions based on any single event. If history is a guide, this will eventually pass, and markets will recover.
As always, do not hesitate to reach out to us with any questions, comments or concerns.
Thank you for your trust!