With the coronavirus front and center of all news, I’m getting a lot of questions about “What do I do in this market volatility?” First, DON”T panic!! You don’t experience a loss in your investments until you sell, thereby locking in your loss. I want to give you my perspective on the current situation, keeping in mind, I don’t have a crystal ball!
The real challenge is not in finding a way to eliminate volatility—it is developing a mental approach to dealing with it. As an investor, you should have your strategy in place to answer questions like:
- Market downturns can and will occur, do you understand market volatility (market goes down and market goes up)?
- Diversification (don’t put all your eggs in one basket) can help you manage volatility without compromising your returns.
- Understand how volatility actually can be an opportunity (think shoe sale).
As the situation worsens, the likelihood of economic fallout grows. To be clear, I am in agreement that the US and global economy will not escape from this episode unfazed. Growth and earnings estimates for Q1 and Q2 should almost certainly come down, in my view.
In question is the degree of economic fallout and whether or not it will trigger a recession in the U.S., in China, or in other developed economies across the world. I could see weaker economies like Japan and Italy posting recessions in the first half of the year, but I don’t see the same fate for the United States, China, or the world at-large.
Let’s start with the U.S. As of right now, I think it’s very possible that GDP gets cut in half for Q1 and could even plateau in Q2, particularly when you factor in the effects of Boeing’s production woes on the 737 MAX. In the view of many economists, the negative impact of the coronavirus will largely come as a supply shock – slower production, interrupted supply chains, bottlenecks in trade. The negative effect here is not zero, but I would also argue that it’s not recessionary. The recession advocates/culprits tend to be sinking demand, job losses, and/or misallocation of capital. We’re not seeing major signs of these ‘culprits’ yet, but to be fair it’s still early.
Market declines often result in emotional decision-making. For example, many investors rationalize that selling out of stocks is the surest way to avoid incurring further losses, but selling in many cases just locks those losses in.
China will almost certainly see a material knock to GDP in the first half. Capital goods exports to China, along with imports from China, are likely to feel continued pressure as Chinese factories are still only operating at about 50-60% of capacity. China’s workers are also enduring layoffs, reduced hours, and cuts to wages – all factors that impact consumer spending and demand. The longer China goes without operating at full capacity, the bigger the hit to GDP. But I would also point out that China grows north of 6% each quarter, so even a substantial hit may not necessarily mean economic contraction.
At the end of the day, my view is that the economic impact of the coronavirus will likely come in the form of a supply shock. The thing about supply shocks is that once the crisis fades and production comes fully back online, the losses can arguably be made up quickly. The hit to demand can abate once the fear of the crisis abates, which historically has taken a few months. History suggests the economic effects – again while not zero – will likely be transient.
It seems highly likely that the coronavirus situation/outbreak will get worse before it gets better, and you can anticipate a spate of weak economic reports in the coming months. Downward revisions to earnings and growth forecasts for the next couple of quarters will probably follow. But in my view, selling stocks now would mean pricing in the worst-case scenario (recession + bear market), which history implores us not to prematurely do.
Instead, I think it is important to remember that volatility is a normal part of the ebb and flow of the markets. I believe the key is not to look for ways to eliminate it, but to develop a mental approach to dealing with it.
Feel free to schedule a FREE 20 minute talk if you want to learn more about how to take advantage of this current market situation, or post a question on my LindaLingo, Financial Coach Facebook page.
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