COVID-19 and the Stock Market

Stock markets are in a tailspin this morning due to COVID-19 concerns. The stock market has dealt with many epidemics (SARS, MERS, Bird Flu, Ebola, etc.) in the past few decades none of which have led to a sustained market decline. Here is a look at the historical market returns 6 & 12-months after the occurrence of epidemics and fast-moving diseases.

At this stage in the market reaction, the best course of action may be offense, not defense. While COVID-19 is contagious it is not dangerous if you practice good hygiene, have access to a modern medical infrastructure, and do not have a compromised health condition (death rates may also be higher in cities with elevated air pollution).

It appears an alarmist mentality is taking hold. There is reason to be concerned and take steps to slow and reduce the spread, but the market appears to be reacting as though our economy is going to grind to a halt.

In terms of your investments, history suggest this is a terrible time to sell stock investments. Investments in money markets, bonds and gold are holding up well. Once we have a sense the market is back in an uptrend there will be an opportunity to reduce the size of those positions to purchase lower-priced stock investments. 

If market reaction over the last 50 years is any indication (see MSCI World Index chart below), the negative market reaction to COVID-19 should be short lived.

I understand the reason policy makers and corporate leaders have taken aggressive action to slow the spread of COVID-19. Once the reaction has settled down it may make more sense for those individuals with a health risk to self-quarantine rather than close schools, cancel sporting events, and cancel conferences. Chances are we will face COVID-19 in the future. If you are healthy and know how to take precautions, ask yourself if you would skip the SXSW conference (South by Southwest tech/media conference in Austin, TX) due to COVID-19. That should help you gauge the economic impact COVID-19 may represent here in the United States.

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