indicatorCompass Commentary

Stock market volatility and the Coronavirus

By ATB Investment Management Inc. 28 February 2020 2 min read

In the last five days, heightened concern about the potential economic fallout from the coronavirus (“COVID-19”) helped precipitate an 8 to 12% drop in global stock market prices. How realistic are investor concerns, and what are the appropriate actions to take, if any?

Graph of the S&P 500 returns since the 2008 financial crisis

Based on price Index levels of the S&P 500


Recent rise in virus transmission

As recently as February 19, the number of diagnosed COVID-19 patients was only in double digits (often very low double digits) in every country other than China. By February 27, diagnosed cases were still very low in most other countries but had increased to over 600 in Italy and nearly 1800 in South Korea. An American patient was also diagnosed who hadn’t travelled to any locations where the virus is present and who had no contact with anyone known to be infected, leading to concern that the virus might already be situated and spreading within the general US population.

Without delving deeply into epidemiology, at least two general conclusions follow the available evidence. First, the virus will likely spread much more broadly than was predicted even a week or two ago. Secondly, the containment efforts in most countries have definitely slowed (but not halted) the virus’s spread from what it otherwise would have been.

 

Will the virus affect the global economy? 

The virus will certainly affect the economy, though its impact will be more pronounced in certain sectors. In the goods-producing part of the economy, as employees stay home for containment purposes, production will fall commensurately. In the service sector, those services which require in-person interaction will be similarly curtailed as increasing numbers of employees are required to self-quarantine or isolate at home. Moving from supply to demand, people temporarily confined to their homes won’t consume goods and services at the same pace they normally would. 

However, in all cases, when the virus’s risk diminishes and eventually passes, the normal pace of economic activity will also resume.

 

Investment implications

Short-term stock price movements, such as a 10% drop in just five days, are often more indicative of tense emotions than of fundamentals. Over time, positive and negative emotional extremes both diminish and company fundamentals come to the fore. The companies whose securities are held within the Compass Portfolios have all faced different business challenges at different times, and now face a new type of challenge due to the coronavirus spread. However, these companies have consistently demonstrated their ability to generate and grow their profits, and we have little doubt that they will rise to the occasion.

 

The path forward

Does this mean that stock prices will immediately calm down? Not necessarily. The long-term benefits of share ownership come with costs, one of which is the bumpy ride along the way. Viewed individually, the size and timing of each stock market bump is completely unpredictable. Viewed as a group, however, it is not at all surprising that bumps occur. It would indeed be much more surprising if bumps did not occur!

Thus, the mantra we’ve encouraged for nearly twenty years during both the bumpy and the calm times is equally applicable to today’s situation. The proven method to meet your investment goals is not to jump haphazardly from point to point in response to the latest media-amplified emotional cue, but rather to set your long-term strategic plan, use it to build a properly designed portfolio, and then stick to that plan throughout the inevitable financial market gyrations.

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