A twin contagion: The coronavirus and fear in the markets

By David Peartree
BridgeTower Media Newswires
In a matter of days, the coronavirus pandemic shifted to front and center in the public psyche.

The first two weeks of March saw the crisis escalate from a newsworthy concern in a few global hotspots to a global pandemic. Seeing grocery shelves stripped bare of ordinary household items is an unsettling sight.

The gravity of the situation is also on display in the financial markets.

Over the last three weeks of trading in the stock market the fabulous returns from last year simply vanished.

Under these circumstances, when events seem out of control and, as one headline put it, the “threat upends daily life,” it may be useful to remind ourselves of the one thing we can control — our own behavior.

It is cliché and, frankly, not very helpful, to simply tell investors to “stay the course.”

Instead, let’s recall a couple of enduring truths about the markets and investor behavior and then consider a few practical actions for investors to consider.

1. The uncertainty is worse than the bad news. Bad news is one thing. The markets are adept at adjusting prices for bad news once they have a good grasp of the information.

However, bad news that comes with a high degree of uncertainty destroys investors’ confidence and breeds fear.

The stock market isn’t reacting as it is because it knows something we all don’t know.

After all, the market is us collectively and, like us, the market labors under the uncertainty of not knowing:

a) How bad will it be? How severe is the illness, how widespread will it become, and how long will it last?

b) How effectively will the government respond? What needs to be done to limit the spread and how effective will the government be at all levels — local, state, federal and international?

c) What will the economic impact be? The actions of consumers (about two-thirds of our economy) and businesses will determine what spending, manufacturing and trade will look like over the coming months.

At present, all anyone can offer are educated guesses to answer these questions. However, as events evolve and we have better information — even if it’s not entirely “good” news — greater certainty should help steady the markets.

2. Emotions can drive the short term, but value drives markets long term. Warren Buffett’s mentor was an investor and financial scholar named Benjamin Graham.

He used to say, to paraphrase him, that in the long run the markets are like a scale but in the short term markets are like a voting machine. Put differently, in the long run markets measure value (corporate earnings and economic growth) but in the short run they reflect emotions (fear, greed and the like).

In the short term, markets reflect the mass psychology of investors and, for now, uncertainty and fear are on display.

The coronavirus pushes both buttons.

Over the long term, however, markets are driven by corporate earnings, and so long as we have reason to be confident in the long-term growth prospects for the U.S. and global economy, the markets should continue to provide good investment returns over the long-term.

The near-term trade-off.

For the near term, we can expect to see a trade-off between public health and economic growth. Governments and municipalities already are taking extraordinary measures to protect the public by restricting travel, limiting activities, imposing curfews and in the direst circumstances imposing quarantines.

Individuals and businesses very quickly adapted their personal behaviors and business practices to engage in “social distancing.”

The point is that these collective actions can’t avoid having some economic impact. At least for the immediate future, it will not be business as usual.

These are trade-offs that most of us are willing to accept to limit the impact of a pandemic. And that means that the market losses of recent weeks could continue for a while. How long? Months? No one knows, but eventually ...

... it will pass.

That this will pass, that economic growth will rebound, and that the markets will recover are as certain as anything can be. It is human nature to extrapolate the present and into the future.

We take what’s happening now and project it into the future. When markets are in full stride, like they have been for much of the past 10 years, we get complacent and assume it will always be so.

When markets tumble, we have a hard time seeing an upside. In the case of a public health crisis, it’s too easy to imagine worst-case scenarios and assume that the crisis will go on indefinitely. This isn’t our first pandemic scare and probably won’t be our last.

Some practical advice

1) The case for doing nothing.

“Stay the course” is not original, but for many it is sound advice. For long-term investors, the allocation you hold when stock markets are rising is supposed to be the same allocation you are willing to hold when stock markets drop.

That means that for most investors, the best way to weather this financially is to stay invested.

John Bogle, the founder of the Vanguard Group, used to turn the conventional advice — “don’t just stand there, do something” — on its head. His advice for investors during market turmoil was the opposite: “don’t do something, just stand there.” His point was that investors can make a bad situation worse by tinkering with their portfolios during difficult markets.

2) Some cases for taking action. For some, however, these markets may be a call to action.

If your stock allocation is no longer appropriate for your circumstances and you have procrastinated about rebalancing, you should decide now what your stock allocation should be and then be ready to act when the market offers an opportunity. If there are funds you will need within the next couple of years, even now you should weigh the costs and benefits of doing nothing versus taking corrective action. If your bond allocation is not holding up well (so far, high-quality bonds are holding up reasonably well), you should re-think what your bond allocation should look like and be ready to change. In each case, if you decide that now is not the time act then, at the very least, file away the lessons learned and be ready to act when the circumstances are appropriate.

For those with taxable accounts, don’t squander an opportunity to harvest losses and use them to offset gains elsewhere in your portfolio or gains in future years.

And for investors with cash ready to invest, and for all investors, better opportunities lie ahead.
David Peartree JD, CFP is a registered investment advisor offering fee-only investment and financial planning advice. This column is a collaborative work by David Peartree and Patricia Foster, Esq. Patricia Foster is a securities law attorney whose experience includes representation of clients in various sectors of the financial services industry, including, broker-dealers, investment advisers, and investment companies. The information in this article is provided for educational purposes and does not constitute legal or investment advice.