The recent market correction, as
with all corrections, is unsettling. What makes this one a little more
unsettling is the velocity at which the correction has taken place: down 13.5%
in about seven trading days. That is a record. Of course panic and fear about
the corona virus has been the catalyst; but the market was overdue for a
correction as tech stocks in particular got to a short term overvalued
position. Some “air” had to come out this market (we mentioned our January
commentary the growing probability of a correction) and corona gave them the
reason to sell. As we’ve said before, corrections are normal and are to be
expected. The stock market “corrects” (meaning a decline of 10-20%) about once
every 13 months, on average, and experiences “adjustments” (down 5-10%) about 3
times a year, on average.
As of now, no one knows how badly
the corona virus may proliferate throughout the world. We can look to history
of these events to give us some perspective. We do know that there will be
economic and supply chain disruptions that will most likely result in a
temporary period of slower economic growth (this is the main reason why the
market has declined). We do know that over the past 30 years, there have been
about 12 major viral epidemics. These have unfortunately resulted in loss of
lives; but the global economy has always gone on to recovery and growth, and we
believe this will be the case with corona.
It is highly likely the corona
virus will dissipate over time like the 12 other viral events in the past 30
years. It is highly likely the world economy will get back on track after a
period (perhaps a quarter or two) of slower growth. We believe it is unlikely
that this event will result in a recession in the U.S. We note that
Microsoft and Google both announced this morning that they are shifting
production out of China to other countries, evidence that the supply chain is
already adjusting. We are also encouraged by the recent actions of the CDC
and other U.S. health organizations to prepare for a possible increase in cases
in the U.S. which we believe should help to mitigate its impact in the
U.S.
While we cannot forecast the future
(no one can), we believe the market has gone quite a ways in discounting a
pretty negative scenario. We do not believe this is time to panic or panic
sell; we would not recommend that in any event as the people who get hurt are
the ones who panic along with them. And as we’ve said many times in the past,
your financial plan incorporates the impact of inevitable market corrections.
Further, your investment portfolios are designed specifically to mitigate the
impact of volatility because 1) they are diversified across multiple asset
classes and 2) they are allocated in such a way as to provide the growth you
need to meet your plan goals while limiting portfolio risk.
As always, if you have questions or
concerns, do not hesitate to contact us.
Robert Toomey, CFA/CFP
Vice President, Research
