Stock markets worldwide have declined sharply this week as investors grapple with the ongoing spread of coronavirus disease (or COVID-19). Over the last two trading sessions, the S&P 500 Index is down 6.3%, and the Dow Jones Industrial Average has fallen by 1,911 points. Capital has surged into traditional safe havens, driving up the price of government bonds and gold. The benchmark 10-year Treasury bond closed today at a record low yield of 1.33% (Bond prices and yields are inversely correlated).
Headlines with words like “outbreak” and “pandemic” are admittedly scary for us all. But before taking any impulsive or drastic action, consider the following facts:
Now for the bad news. Global containment efforts related to COVID-19 will undoubtedly have a material impact on economic growth and corporate earnings. As large cities are put under quarantine, factories are shuttered, flights are canceled, border crossings are tightened, and travel is restricted, economies will inevitably slow. How long such a slowdown lasts is the big question. This past weekend’s news of the disease intensifying in South Korea, Italy, and Iran demonstrated that we may be coping with coronavirus outbreaks for months to come and led to the dramatic selloff in equity markets. The Federal Reserve has signaled that it is closely monitoring the economic impacts of COVID-19 and is prepared to lower interest rates to stimulate growth when such a move is warranted.
Most importantly, don’t panic about the possible impact of coronavirus disease on your portfolio. Keep the long-term in mind. Stocks offer higher expected returns precisely because they are risky. For the past 11 years, stock market volatility has been very low and risks have been less obvious. Yesterday morning, we were reminded of these inherent risks. Remember that the attractive historic returns on stocks include many difficult timeframes, including world wars, recessions and depressions, high inflation, epidemics, terrorist attacks, and corporate scandals.
Also, as interest rates have declined in the last few days, mortgage rates have dropped significantly, too. If you have a mortgage with an interest rate of 4% or higher, you may want to call your lender or mortgage broker to see if it makes sense to refinance.
We will continue monitoring the global economic situation and keep you informed of our observations and insights. We will also look for opportunities to rebalance our client’s portfolios (which will probably mean selling bonds and buying stocks at lower prices) and harvest losses for tax purposes.
Please do not hesitate to contact your wealth advisor if you’d like to discuss your portfolio or overall financial situation.