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The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.

One of our fundamental principles is that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced last month that it expected revenue to take a hit from problems making and selling products in China¹. Australia’s prime minister has said the virus will likely become a global pandemic², and other officials there warned of a serious blow to the country’s economy³. Airlines are preparing for the toll it will take on travel⁴. And these are just a few examples of how the impact of the coronavirus is being assessed.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

One of our most important roles as financial professionals is to help you develop and stick to a long-term plan that can weather a variety of conditions. This year will likely be known as the year of the virus, but it’s important to recognize that the value of bonds and stocks depends only to a small extent on the current year, and much more on what happens in the years and decades ahead. Our expectation is that the impacts of the virus on global financial markets while difficult to handle today, will be short-lived. Even those with the direst of scenarios (a global pandemic and recession) expect a recovery in late 2020 or into 2021⁵. As you know, we advocate against making significant changes in your portfolio due to emotions or the news cycle; however, times like these are a great opportunity for you to confirm that your investment allocation is well aligned to your goals and time horizon. If there have been any recent and significant changes to your long-term goals, please contact us to discuss.

Finally, there is always some upside even in the downside. Given today’s ultra-low interest rate environment, and recent rate cuts, this may be a unique opportunity for you to think about refinancing your home, student or other debt to lower your payments and save on the long-term cost of your debt. If this is something you want to explore and discuss, give us a call.

FOOTNOTES

1. ¹Apple, February 17 press release. https://www.apple.com/newsroom/2020/02/investor-update-on-quarterly-guidance/
2. Ben Doherty and Katharine Murphy, “Australia Declares Coronavirus Will Become a Pandemic as It Extends China Travel Ban,” The Guardian, February 27, 2020. ²https://www.theguardian.com/world/2020/feb/27/australia-declares-coronavirus-will-become-a-pandemic-as-it-extends-china-travel-ban
3. ³Ben Butler, “Coronavirus Threatens Australian Economy Reeling from Drought and Fires,” The Guardian, February 5, 2020. https://www.theguardian.com/business/2020/feb/05/coronavirus-threatens-australian-economy-reeling-from-drought-and-fires; Ed Johnson, “Australia Says Economy to Take ‘Significant’ Hit from Virus,” Bloomberg, February 5, 2020. https://www.bloomberg.com/news/articles/2020-02-05/australia-says-economy-to-take-significant-hit-from-virus
4. ⁴Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020. https://www.wsj.com/articles/germanys-lufthansa-makes-cuts-as-it-braces-for-coronavirus-impact-11582712819
5. ⁵McKinsey & Company, “Coronavirus COVID-19: Facts and Insights,” March 9, 2020.  https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Risk/Our%20Insights/COVID%2019%20Implications%20for%20business/COVID%2019%20March%209/COVID-19-Facts-and-Insights-March-9-vF.ashx