The Clash, in case like me you had a memory blank!!
The world is watching with concern the spread of the new coronavirus, panic buying of antibacterial handwash, toilet rolls and bottles of water, meetings being cancelled, alongside some hilarious facebook videos of what you can use for a makeshift face mask!! What should you do?
The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.
We believe that the markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.
The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009.
Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
We considered a wide range of possible outcomes, both good and bad, when helping you establish your asset allocation and portfolio. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.
So be strong, stick to your portfolio and maybe even invest in this downturn . . . ?!
