gmhTODAY 30 gmhTODAY April June 2020s - Page 59

Market Volatility and the Coronavirus By Daniel T. Newquist, CFP®, AIF® Daniel T. Newquist, CFP®, AIF® is a Principal Wealth Advisor with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill with over 20 years experi- ence advising clients on their personal wealth and business planning needs dnewquist@ or call (408) 779-0699. T his heightened concern surrounding the outbreaks of the novel coronavirus (COVID-19) outside of China sent global stock markets lower as investors assess the potential impact of the virus on the global economy. While we don’t know how many people the virus will infect, the length of this viral cycle and what infl uence it will ultimately have on the economy, we do know that you may have some questions about how this might impact your investments. When markets change this quickly, as they are prone to do, it can come as a shock and raise questions about whether they might fall further or whether changes in a long-term allocation plan are appropriate. While we continue to think that making changes to a long-term allocation plan in response to short-term volatility is almost never warranted, we still wanted to provide some perspective on risk and the events that are driving the market. Stock and bond markets are forward-looking, and the stock market has already incorpo- rated the possibility that the coronavirus outbreak could spread further. From here, how the stock market moves will depend upon whether the outbreak is better or worse than currently expected. Because it’s not possible to consistently outguess the market’s best estimate, the best approach is almost certainly to stick with your allocation plan. While the stock market has been relatively calm over the last decade, there are typically mul- tiple points in the year where it declines, even during years where returns are positive. Historical market data 1 shows that the U.S. market has had 158 different two-day periods where it declined by 4% or more, 49 where it declined by 6% or more, 15 where it declined by 8% or more, and five where it declined by 10% or more. Because there are about 90 years of high-quality history for the U.S. market, this means that, for example, declines of 6% or more over a two-day stretch tend to occur about once every two years. In other words, markets have a notorious history of sharp declines even though they tend to go up over time. In the moment these events can feel extreme, but they tend to occur more frequently than most investors would guess. Markets have experienced multiple other periods with outbreak-related scares. Dow Jones compiled data associated with 12 other out- breaks, and the table to the right reports those U.S. Market Return Following Select Epidemics events along with the returns of the U.S. market in the six and 12 months following the outbreak month. While the market responded negatively to some of the events reported in the chart, the U.S. market tended to be up significantly in the six and 12 months following. No one can pre- dict exactly how the coronavirus will proceed, but markets are typically very efficient at pricing risk. What should a long-term investor do about short-term market volatility? We believe inac- tion is going to be your best course of action. Your comprehensive financial plan is fully cog- nizant that volatility will occur – whatever the underlying event may be – and incorporates such outcomes. Our advice remains the same, to stick to your long-term plan and tune out the noise. We invest client money in a way that isn’t dependent on lucky guesses or get-rich-quick schemes. We use investment strategies and prepare financial plans that assume events like these will come and go. So, please, stay positive and focus on your family and your health. If you want to think about the virus, send positive thoughts toward those infected by the virus. If you have any questions about your investments, or want to discuss your financial planning needs, please reach out. We are here to help you reach your financial life goals. ––––––––––––––––––––––––– 1 Data sources Ken French Data Library, Bloomberg, MSCI and St. Louis Federal Reserve. Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and own movement in the value of your assets). All investing involves risk, principal loss is possible. GILROY • MORGAN HILL • SAN MARTIN SPRING 2020 59