When the stock market is volatile, staying focused is key to long-term wealth
Stock market declines over coronavirus fears
During the past month, convern over the coronavirus gripped investors, as both the Dow Jones Industrial Average and the S&P 500 index fell by over 3 percent, the most significant daily declines in two years. As more cases of the coronavirus are confirmed, and stock market volatility continues, many investors are worried about their nest eggs. In this article, we examine what previous stock market declines have taught us to cope with our current uncertain economy.
How the stock market reacts to new cycles
Historically viruses have caused the stock market to overreact, which has lead to significant buying opportunities. Over a 38-day trading period during the height of the SARS virus in 2003, the S&P 500 index fell by 12.8 percent. During the Zika virus, which occurred at the end of 2015 and into 2016, the market fell by 12.9 percent. There are other examples, but they all passed, and the market recovered and went on to hit new highs. Will this happen again? While it is impossible to predict what the markets will do, history has shown us that a correction is probable.
How will the U.S. economy be affected by the coronavirus?
From a macro-economic point of view, the question is, how will this impact the U.S. economy over the coming year? The U.S. is relatively insulated, with a fantastic health system. It started the year with solid economic data, and so far, most economists’ views have not changed.
Capital goods exports to China, along with imports from China, will be depressed given the struggles to reopen factories abroad. Most Chinese factories are still operating at about 50-60 percent of capacity. With China being home to seven of the world’s busiest container ports, there is bound to be some impact. Companies that depend on China for technology and manufacturing will experience some decline. Inventories in the U.S. will be depleted more rapidly, but once the virus subsides, expect faster accumulation of inventories in the second half of the year. All industries are subject to revenue decreases from current events, and unfortunately, the vacation industry, specifically cruise and airline companies, could be severely affected by the current news cycle.
China, being shut down for a month, will have a global impact. However, lower earnings in the first half of the year should be made up by a strong rebound in the second half of 2020 with payback from lost months. Demand remains strong, and there has been no visible impact on the job market, as shown by initial unemployment claims. Supply disruption is the issue.
What should investors do?
On average, after a four-month adverse stock market, the economy has historically rebounded sharply. It’s important to remember we have a very resilient economy. With the right long-term plan in place, you can avoid making emotional decisions that often lead to buying high and selling low. Those who already have a comprehensive retirement plan in place can likely rest easy knowing that they have a plan for the future. However, if you’re 5-10 years from retirement and without a financial plan, now more than ever, it’s time to take action. Working with a qualified financial professional can bring you peace of mind as you ride out the current market volatility.
Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. Retirement Income Strategies is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.
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