The Wuhan Outbreak and Your Money

It’s an OUTBREAK!  The news is buzzing, Netflix just launched a documentary on pandemics, and the financial headlines read:


“Global markets swoon as lethal virus in China spreads.”  ~ Washington Post


“Wuhan virus isn’t just hitting Chinese stocks – here’s how global oil and bond markets are moving.”  ~ Business Insider


“Stocks fall as Second Virus Case in U.S. Spooks Investors.”  ~ New York Times


So what now?  Should you be freaking out, selling your stock holdings and putting your IRAs, 401ks, and other retirement savings into cash and money market positions?  Is this the final top of the 2nd-longest bull market in U.S. history?


When you look back at the last 50 years, you can see how the market has reacted to previous pandemics over time.  There are three things that stick out to me here in the intermediate-term:


  1. Global stock market performance six months later is up +8.50%, on average,
  2. The market has only been down 31% of the time, six months later, and
  3. When it’s down, the average loss is only -2.90%.



World-Epidemics-vs.-SPX The Wuhan Outbreak and Your Money


In the short-term (1-month out into the future):


  • The market is only up 31% of the time,
  • When it’s down over the following month, the average loss is only -2.37%, and
  • When you combine the wins and losses together, the average return is actually positive, at +0.44% a month later.


So, no… for the long-term investor, I do not think this is a time to be freaking out, selling stocks and shifting all your investments into guaranteed savings.  Instead of reacting emotionally to news, one should instead react rationally to objective analysis if real data.  And the data is telling me that there is very little correlation between viral breakouts and major market tops.


But still, couldn’t the market crash over the course of the next 18-24 months, from here?


Well, of course that’s always possible!  However, those who try to “guess the top” are people who almost never succeeded as investors.  They might get lucky once – maybe twice – but attempting to predict the future is never a sustainable strategy!


Observing the rational, objective information I just shared with you in the chart above, I think it’s much more likely that we experience a short-term pullback or “consolidation” over the course of the next several weeks (or even the next few months).  Not to mention, this would be healthy, in my opinion.


A “pullback” would likely be limited to a drop of -2-8% or so.  A “consolidation” on the other hand, would represent a sort of sideways, ping-pong movement in the market, where it moves up and down with more volatility than we’ve seen in the last 3+ months, but without any significant pullback.  Again, either of these things would be perfectly normal.


With that all being said, and while I’m a trend-follower, not a trend predictor, I continue to believe that Trump wants to be re-elected, and that he’s made the stock market his barometer for success.  Thus, it will continue to be in his best interest to further policies (both economic and geopolitical) that will make the market happy between now and Election Day.


So for now, if we see a material pullback in the market (and that’s a big, fat if, I must emphasize), I would be considering it a buying opportunity for those who have cash on the sidelines.


However, just know that the market doesn’t have to pull back – and it doesn’t have to give you the sale that you “want.”  Rather, “sideways” is definitely a possibility from here, so if you’re an investor who feels you have too much cash, don’t be greedy, don’t try to predict how low it will go (if it goes low at all!), and don’t try to out-smart the market.

The market is your boss, not the other way around.  You must invest with the trend, not against it.  And the intermediate and long-term trends are still unequivocally up!


Till next time…


Categories: Adam Koos, CFP®, CMT®, Market Commentary

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