2020 Corona Virus Market Correction

The corona virus continues to dominate the financial press and has resulted in one of the fastest 10% drops in the stock market that we have seen. While its been fast and furious, I think its important to remember that throughout history the patient investor has been rewarded for taking risk and staying in the market.

The Average Drop in any given year from the market high is 13.8%

As the chart above shows, in any given year we see an average drop of 13.8% from the market high. Even with the recent 10% drop the S&P500 quickly saw. We still have not gone beyond a “normal” stock market pull back. While it can be difficult its important to remember the patient investor is rewarded.

While less common, we can see market corrections of 20% like we saw near the end of 2018. Investors that were patient and stayed invested, enjoyed a great 2019.

It has Always been a bumpy ride even when hindsight feels smooth

The past run since 2008 has survived:

  • Muni Bond “Crisis” – some analysts were calling for massive losses in the municipal bond market and that it would not only hurt the bond market but would hurt equities. Neither the bond market or stock market sufferred and its been a long time since we have heard concerns about massive amounts of muni bond defaults.
  • Greece’s Economic Mess would take down Europe and the US would follow – The market dropped in 2011 but it was short lived and the market continued its climb
  • War on terrorism
  • Previous Epidemic Scares
    • Swine Flu in 2009
    • Cholera in 2010
    • MERS in 2013
    • Ebola in 2014
    • Measles/Rubeola End of 2014 Early 2015
    • Zika Virus at Olympics in 2016
    • Measles/Rebeola 2019

Previous Epidemics have had minimal long term impacts on the Market

You can read the article I wrote a few days ago which discusses the previous impacts of epidemics here:

Corona Virus – History Lesson

Doing the “Right” thing feels a little wrong

There is a temptation to “do something” despite research showing us that time and time again, the best advice is to persevere through market pull backs and corrections. Trying to time the market is paved with people that have failed attempting to do so. Here is a quick reminder of the rewards of sticking to our model and long term plan:

This chart from JP Morgan shows us a few things. The Average investor under performs nearly any asset class over the past 20 years. The only way the average investor can under perform nearly every investment is by market timing or by jumping from one fad to the next. Had the investor stuck with a 60/40 portfolio they would have earned over 3% higher returns. Bear in mind the past 20 years from 1998 to 2018 are starting at nearly the peak of the dot com bubble. So the returns are inclusive of both the dot com bubble bursting and the financial crisis.

The next thing to remember is that 2008 was the worst stock market of our lifetimes. However, the recovery came swift and a return to value

  • 40% stocks/60% bond portfolio recovering by November 2009
  • 60% stocks / 40% bond portfolio recovering fully by October 2010
  • The 100% stock S&P500 recovered full by March 2012

A Reminder not to let short term results impact your long term plan

Its often easy to say that we should invest for the long term and stick to our plan. However, once we are in the middle of a market correction, it can be challenging. Here is a reminder of the article I sent the last time the market dropped 20% in 2018 before having a great 2019:

Market Correction – Do Not Let a Market Drop Ruin Your Long Term Investment Plan

Clients should not hesitate reaching out to me to schedule a meeting or call. I am here and working on helping you reach your financial goals.

** The information on this website is intended only for informational purposes.  Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

Corona Virus – History Lesson

Today (2/24/2019) the Corona Virus impacted stock markets driving market indexes down more than 3%. Fears of the impacts of the virus results in a relatively large one day drop for the stock market. I wanted to review past Epidemics to help calm investors and understand the risks to their portfolios and the most prudent action going forward.

Is it Time to Panic?

The simple answer is no. The panicking investor has rarely been rewarded. Right now is the time to look at history and review the results. Market Watch has a great article that shows the past results of similar health scares. https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22

Past History lessons of Health Epidemics with the US Stock Market

EpidemicMonth end6-month % change of S&P12-month % change of S&P
HIV/AIDSJune 1981-0.3-16.5
Pneumonic plagueSeptember 19948.226.3
SARSApril 200314.5920.76
Avian fluJune 200611.6618.36
Dengue FeverSeptember 20066.3614.29
Swine fluApril 200918.7235.96
CholeraNovember 201013.955.63
MERSMay 201310.7417.96
EbolaMarch 20145.3410.44
Measles/RubeolaDecember 20140.20-0.73
ZikaJanuary 201612.0317.45
Measles/RubeolaJune 20199.82%N/A
—Source: Dow Jones Market Data

Note: I borrowed that table and information from the marketwatch article.

As we can see of the 12 previous epidemics, only one had a 6 month negative return for the S&P500 (HIV/AIDS 1981 0.3% Loss). Only two epidemics had negative returns over the next 12 months (HIVE/AID 1981 16.5% loss, and Measles/Rubeola 2014 with a nearly flat 0.73% return).

World Stock Market Impacts

Great Chart from the Market Watch Article

The above chart I also took from the market watch article. This chart shows the world market return as many of these epidemics started outside the US. As expected, the performance was worse than the US market, however some interesting findings are there.

  • Average returns are not just positive over the 1 , 3, and 6 month periods, the 6 month average return is an impressive 8.50%
  • 9 of 13 periods showed a loss over a 1 month period
  • 4 of 13 showed a loss over a 3 month period
  • The same 4 epidemics showed losses over the 6 months period, with losses of 3.25%, 4.30%, 0.57%, and 3.49%. In all cases, these 6 month losses are fairly tame.

Conclusion – Epidemics historically have had minimal risk to portfolios

While its always possible “this time is different”, history has show us that epidemics are likely the least cause for worry for our portfolios. The fear is that we could have another black plague that devastated Europe and Asia in the 1300s that killed 20 million people in Europe (1/3 of the population). However, modern sanitation and public health practices has mitigated the black plague. The combination of modern medicine, health practices, and modern sanitation greatly reduce the odds of another mass plague.

So while the Corona Virus is scary, the odds are your portfolio should weather this threat well. While we cannot predict the future and the risk that “this time is different”, the past epidemics in modern times have had minimal impact on portfolios. As is usually the case, maintaining market risk/exposure is the prudent course of action and the calm/patient investor will most often be rewarded.

** The information on this website is intended only for informational purposes.  Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

Secure Act Summary

In the closing months of 2019 Congress Passed the Secure Act and it has some relatively large impacts on retirement savings and retirement plans going forward. I have read several articles digesting the impact of the act but I think Fidelity has put together the best article that details the impacts fairly well.

Secure Act – Fidelity’s Article here

https://www.fidelity.com/learning-center/personal-finance/retirement/understanding-the-secure-act-and-retirement

Secure Act – High Level points:

  • Require Minimum Distribution Age has been changed to 72 from 70.5
    • This only impacts those that have not started RMDs. Those who started RMD’s in 2019 will need to continue to do so even if they are younger than 72
    • As a reminder this is the age you MUST start taking distributions from your retirement accounts that are tax deferred (Roth’s are post tax and are not subject to RMD’s as of the time of this article).
  • Removed the age limit on Traditional IRA contributions (still required earned income)
  • If you worked part time > 1000 hours in one year or > 500 hours over 3 years, you are now eligible for your employers 401k.
  • Parents can withdraw Penalty free up to $5k from retirement accounts the year of a child’s birth or adoption
    • NOTE – This will still be subject to income taxes
  • Basically killed the “stretch” IRA. If someone inherits an IRA that is a non-spouse, funds must be distributed and pay tax with 10 years
  • Added a tax credit for small businesses starting a retirement plan
  • Allows up to 10k to be distributed from a 529 plan to pay down student debt.

If you have any questions on how this may apply to you, please do not hesitate contact me. Please note that the information from this post is meant to be educational and should not be considered advice. Clients should contact me to receive specific advice on your situation.