There is nothing that the stock market hates more than uncertainty. When news broke about the coronavirus, a dip in the markets followed almost immediately after. So did the financial headlines which were full of words such as “would,” “could” and “might” in relation to the potential impact of this latest health scare on individual businesses.
For those who trade the stock market, these brief fluctuations will be evaluated in micro moments, where every little move up or down represents profits lost or gained. However, if you are investing in stocks with a long-term vision, these unexpected societal occurrences provide an opportunity to buy assets at a discount.
Our natural instinct during these quick and steep selloffs is to join the masses and do the same.
But we’d be better off by studying history. These situations have happened plenty of times in the past, and they will undoubtedly happen again in the future. Whether it was SARS, Zika or avian flu, these illnesses all led to a brief sickness in the world’s markets.
“Generally speaking, these once-in-a-lifetime big bad things initially are under-worried about and continue to progress until they become over-worried about, until the fundamentals for the reversal happen,” Bridgewater Associates founder Ray Dalio wrote in a note.
When looking at the market after the six previous outbreaks dating back to SARS in 2001, a chart by Helios Quantitative Research showed that all the selloffs proved to be quick and sharp before bouncing back within 90 days.
The emotional response tends to be much greater than the actual impact. Yes, past performance is not a perfect predictor for the future, but it does provide hints of common trends.
The near-term losses for some companies are real and shouldn’t be dismissed. However, unless these companies are severely broken as a result of one of these health issues, then expect a bounce back. Listen to how the companies communicate during the quarterly report immediately following the selloff for more info on their future.
Take your emotion out of the decision making. These short-term reactions to the latest outbreak are an opportunity to review your investments. Seeing all the red typically leads to a charging bull shortly after, which in the case of the latest health scare can mean greater future gains for your portfolio.