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There is a wonderful quote about the stock market often uttered by Warren Buffett, who attributes it to his mentor and author Benjamin Graham. “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
How is this relevant? Well, think about where we are at this moment in the investment markets. At last check (March 5th, 2020 at around 3pm), the market is down more than 1,000 points (or almost 4%) today, giving back the gains it made yesterday, which earned back the losses from the day before, which gained back the gains it made the day before that, which….you get the point!
For more than a month, U.S. investors have been watching closely as the world deals with its current foe—the novel coronavirus. Through much of February, domestic markets remained unscathed (as is common when we view something as happening “over there.”). That came to a screeching halt last week as the US markets experienced their worst week in more than a decade.
Many thought that a new week, and a fresh news cycle, would help the market continue its habit of having a very short-term memory and springboard us back to the cool, calm waters of rising investment accounts. Unfortunately, if this week has brought us any waters, it is those that make us all remarkably seasick.
So, what’s happening? There is no question that this market event different from those that have previously threatened our bull market. The main reason is that there is very real concern about the potential for supply chain (the parts that make the items they make) interruption to U.S. companies. Across many sectors, US companies are dealing with the reality of potential product shortages and workforce precautionary measures such as office closures and remote access. Product and/or work stoppages could result in layoffs, revenue shortfalls, and other economic hardships that make investors run for the hills.
Logic and economic data alone are not responsible for a double-digit market drop over the past 10 days and all the swings in between. In some ways the market has been looking for reasons to go down for over five years. For what feels like an eternity, we in the finance sector have been prognosticating about what might or might not be the end of a historic market run since 2009. All that pent-up anxiety seems to have created the perfect environment for an overcorrection.
In the short term, stock prices, whether they’re driven higher or lower, reflect a popularity contest—an emotional opinion that requires nothing more than money to perpetuate. At least in part, that is what is happening right now. Is coronavirus a real crisis? Yes. Could it bring about the winds of recession to the global economy? Most definitely. But has that epitaph been written? Definitely not.
Bottom line, we do not know enough about coronavirus yet to determine how much it will spread, whether there will be mass quarantines that close schools, offices, transportation hubs, etc. here in the United States, or if it will go quietly into the night once temperatures warm.
And keep in mind, most investors are down somewhere between 1.5% - 3% for the year. Yes, that is a far cry from the significant gains that had been made through mid-February, but after a year of solid double digit growth, a few tics below the Mendoza line is not a reason to crawl inside of your mattress with all of your invested dollars.
As is always the case when the market corrects, now is the time to shelter in place. If your portfolio was previously allocated in a way consistent with your risk tolerance and financial goals, then guess what…it still is today! Your long-term objectives and your ability to achieve them remain unscathed.
As Warren Buffett said, in the long term, the market is a weighing machine. Stocks gain value because of growth, inflation, dividends, and return of capital and even with coronavirus as part of our landscape, they still will.
In the meantime, wash your hands, stay healthy and get ready for spring!