The Impact of the Coronavirus on the Markets
In the 1970s sitcom, Sanford and Son, junk dealer Fred Sanford would commonly clutch his heart, look toward heaven and cry out to his late wife: “This is the big one! Elizabeth, I’m coming!” Well, this market correction (yes, we have now entered correction territory) is not the big one and you don’t have to prepare for the end.
It is tough to tell how much the coronavirus will impact the economy and corporate earnings but it does appear that some panic selling has now seeped into the markets. To be clear, some of the selling – particularly in stocks that had become overvalued – is justified. But there is also a lot of selling that could be described as “throwing the baby out with the bathwater.”
The market correction that we are experiencing illustrates the importance of diversification. It is not always bad to lag an ever-rising bull market. It’s a good thing to have investments in a portfolio that are not highly correlated with the stock market and that can work to mitigate downside when we do experience a downturn in the stock market.
While stocks may continue to decline in the near-term, this correction will run its course. Indeed, we believe there is a good chance there are more corrections ahead of us. However, we do not believe that this is a time to panic. It is true that nobody really knows the ultimate impact of the coronavirus on the global economy but it is important to remember that the economy is like a big ocean liner; it can’t stop and turn on a dime. The economy has been fairly strong, led by a resilient consumer. Unemployment in the US is at 50-year lows and real (inflation-adjusted) wage increases are occurring. These factors would imply that even a coronavirus-driven slowdown may be blunted.
Our goal is to stay focused on your long-term goals and objectives and to match your resources to meet those objectives. We subscribe to Warren Buffett’s philosophy of buying when others are fearful and selling when others are greedy (as we have over the past year by pruning equity positions that have become fully valued). We will look for opportunities that result from this correction but will remain diversified and focused on the long-term.
If you have any questions, please contact your financial strategist or me.