What Should You Do About Last Week’s Market Correction? Nothing.
Co-founder and CIO
02 March 2020
Last week, more cases of COVID-19 were reported outside of China causing markets to take a hit for several days, with the S&P 500 booking the worst week since 2008 and officially going into correction territory (i.e., a market drawdown of 10 to 20%). Given this latest development, we thought we’d share our perspective on what’s really going on in the markets and what it could mean for your investments.
The markets are reacting to the spreading COVID-19
As we’ve seen with China in the past month, a virus outbreak can cause plenty of disruption in day-to-day productivity, which could translate to lower economic output. With new COVID-19 cases now cropping up in the US, Japan, Korea, and parts of Europe, investors are understandably worried that the widespread disruption to global trade could be forceful enough to cause a large-scale impact on global growth. So, the markets are reacting to these fears about the economy, even though economic indicators have not substantiated any of these fears.
Compounding to that fear, the threat of the virus feels more imminent and direct to the health and safety of the everyday individual. This heightened level of uncertainty can cause even the most reasonable investor to act emotionally. We started the year with the markets breaking new highs and investors took it as an opportunity to jump onto the bandwagon. But these investors who jumped onto the bandwagon are also more sensitive to negative newsflows. So it makes sense that in our current heightened state of uncertainty, emotional investors are prone to panic-selling, which causes a correction, such as the one we’re seeing now. But remember, corrections are common, even in a bull market; it’s a way for the market to flush out bad behaviour, such as overconfidence and FOMO (fear of missing out) and move forward more sustainably. This is the sixth correction in this current bull market!
China seems to be recovering
As expected, analysts cut economic growth forecasts for China for the first quarter of 2020 because production was halted throughout most of February while China battled to contain the outbreak. China seems to be recovering from this setback: Over the last several days, the recovery rate of infections has been exceeding the number of new infections reported in China. China has also resumed business, and the Chinese government continues to prop up growth with further economic stimuli.
Central banks are prepared to provide economic stimuli in the face of COVID-19
After witnessing persistent declines throughout 2019, we’ve seen a strong rebound of 0.8% MoM in the January LEI (Conference Board Leading Economic Index). It’s important to point out that this is the largest monthly increase since October 2017. Although this data point does not yet reflect the effects of the COVID-19 outbreak, the good news is there is prevailing momentum in the economy that can weather the epidemic. We’re also likely to see more global central banks joining the People’s Bank of China in providing economic support. In a rare statement issued on Friday, 28 February, Fed Chairman Jerome Powell has pledged to “act as appropriate” to support the US economy in regards to any impact the virus may have on it. This pledge has opened the door for a rate cut at the upcoming Fed’s policy meeting on 17 and 18 March 2020.
Past pandemics have had only short-lived effects on the markets
When the virus first broke out in China, we analysed the impact of such an outbreak on the markets from past epidemics. Specifically, we looked at global markets’ performance, proxied by the MSCI World Equity Index, in the months that followed the first reports of a virus or disease. While some epidemics did spark a market correction (which is what we are witnessing now), their impacts tended to be short-lived: with drawdowns lasting less than 2 months. The HIV/AIDS pandemic in 1981 was the exception with 5.1 months of market impact. Some may argue that COVID-19 is different than all previous outbreaks because the world is a lot more interconnected (think: now we have a global supply chain).
Don’t be your money’s enemy
There aren’t many more devastating things you can do to your investments than to get out of the market when the market takes a dip, no matter what caused the dip. The market never stays down. It will come back up, if you take it out, your money won’t be there to reap those rewards. Your investments with us are optimised to withstand these drawdowns. The markets will react to anything, and it’s your job to stay in the market especially when the markets are down.
In December 2018, as we went through the deepest correction in the last 10 years, we told you to maintain your investments and investment plan as they were: the clients who listened were immensely rewarded in 2019 when the market swiftly recovered. The data currently available suggest that this market correction and situation are similar, as the economic fundamentals behind the markets remain solid. As always, we’ll be monitoring the economic and leading indicators, and will make adjustments when necessary so that your portfolio continues to remain resilient throughout these ups and downs, maintaining a long-term view. While we do that, keep your money in the markets so that you don’t miss out on the eventual rebound.