As your adviser and a fellow stock market investor, I understand it can be concerning to see multi-day declines in the stock market. Media outlets and the inevitable "doomsday" chain emails forwarded from family and friends can also serve to increase the sense of unease investors feel during periods like this. In addition to the video above from Dimensional, I hope to offer a few points of perspective below to help reassure you if you're feeling unsettled about this week's events.

 

Point 1: Volatility is a sign investors are behaving normally. What we are seeing is the expected behavior of investors as they adjust their expectations for near-term profitability and earnings for those companies whose supply chains are affected by the Coronavirus outbreak in China. If profits are expected to decline in the near term, investors should want to pay less for the stock of that company today. It would actually be unusual and concerning if markets did NOT react in some way. We can be comfortable with temporary volatility knowing it is precisely this variability of returns that enables us as investors to expect a return on our money above that of risk-free investments. In other words, unless I am willing to live with the risk-free rate of return, I need to be comfortable with volatility at some level.

 

Point 2: We've seen this before. The reaction of the markets to the current viral outbreak is similar to the SARS outbreak in 2003 and the Zika virus outbreak in 2015-2016 during which markets declined by 12.8% and 12.9% respectively.   You can review the linked article for insight on those incidents and how the markets reacted. The point is we have precedent for events on this scale to give us insight into "how the film ends". Also, it's important to remember the US economy has become more insulated from foreign events as companies had already started shifting supply chains to be less dependent on China after the US-China tariff disputes in the last two years. This may ultimately help mute the domestic economic impact of the outbreak.

 

Point 3: Mid-year declines tell us little about the expected performance for the year. The graph below from Dimensional illustrates how intra-year market declines (meaning they occurred sometime between January and December) of greater than 10% happened more than 19 times from 1979 - 2018. That means the US stock market experienced declines greater than 10% at some point during the year in nearly half of the last 40 years. However, we also see how only six of those years had a negative return for the entire calendar year. This is a good reminder that several bad days do not necessarily mean the year will have a negative return for those who stay invested.