Mar 16, 2020 | BEN WAITE
Published: 27th February 2020
Coronavirus is hitting the headlines across the world – we’re sure you’ve noticed! But it’s also hitting stock markets which have fallen from their recent highs due to uncertainty around the world.
Global uncertainty generates a lot of media noise and we know this can make people feel uneasy about their investments. So, we thought it would be useful to look back at similar epidemics to understand what impact they have on the markets. It might surprise you that stock market/Standard & Poors 500 reactions to such epidemics are fast moving and often short lived, as the following table below shows:
Whilst the above data looks at the US stock market, it’s the same story across the globe. Data from Charles Schwab, tracking the MSCI All Countries World Index, shows that the index gains an average of 0.4% in the month after an epidemic, 3.1% in the ensuing six months and 8.5% a year later. History may not repeat itself, but markets do have a tendency to be remarkably resilient.
What does this mean for your investment portfolio? Yes, in the short-term there will be falls in value but that’s completely normal! We know from years of evidence that even in ‘good’ years for stock markets, falls happen, and each time the reaction from investors is similar – they question their current investment strategy and make short-term trading decisions – usually to sell! This is exactly what is happening with markets at the moment, as investors and traders alike try to second guess the short-term economic impact of Coronavirus and the companies whose profits will be worst affected.
Short-term downward movements in markets can happen at any point, yet that doesn’t necessarily mean the year’s end return will be the same or worse. The following chart from JP Morgan’s ‘Guide to the Markets Q1 2020’ highlights this by looking at the calendar year returns of the FTSE All Share Index. Last year for example, the return (excluding dividends) was 14%, yet the biggest short-term decline was -8%!
As always, our advice during times like this is to remember our sixth guiding principle ‘control your emotions and think long-term’. No-one knows how long Coronavirus is likely to be an issue and what the short-term economic impact will be. But what we can say is that companies’ profitability will recover and so too will global stock markets. In the long-term, keeping invested in global stock markets has amply rewarded the disciplined investor.
Your investment portfolio also benefits from diversification depending on how much you are invested between growth and defensive assets. For instance, whilst the media headlines highlight the 5% plus falls in stock markets this week, few will also mention that the yield on US 10 year Government Bonds has fallen to an all-time low (bonds’ yields and prices move inversely to one another). US Government Bonds are viewed as a ‘safe haven’ in times of turbulence, and along with other high-quality global government bonds, are held within the Defensive assets of your portfolio.
Whilst we also don’t condone market timing decisions, times like these can also present the opportunity to buy into markets at lower levels. So, if you’re sat on some spare cash and you’re willing to take a long-term view, taking advantage of these market falls is worth some consideration.
If you have any questions, please get in touch with your Relationship Manager.
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