There’s an old saying that the stock market goes up like an escalator and down like an elevator. There haven’t been too many weeks in which this was more true than this one. Unless you’ve been in a cave with no TV, you’re aware of the steep market selloff due to fears of the spread of the coronavirus. Where we stand as of this writing Friday morning (2/28/2020) is the U.S. stock market is officially in correction territory (down more than 10%) through Thursday with the worst stock performance in a week since the financial crisis. Friday is currently showing additional losses. Overseas markets have also had significant losses. On the plus side, investors such as retirees with lower risk portfolios that last year were envious of not participating fully in the rapid rise in stock prices are now benefitting from having a diversified portfolio as high quality bond investments have performed well this week with yields declining to record low levels.

So what now? The answer as far as the near-term direction of the stock market is that we don’t know. The answer for the coronavirus is we really don’t know. What we do know:

The stock market has been through a lot of crises in the past

• Stock corrections, unfortunately, happen on a fairly regular basis (although they typically aren’t this rapid).
• The U.S. stock market performed extremely well in 2019 and while the recent declines are painful, stock prices are roughly back to levels they were at in October of last year.
• There will likely be an impact on the U.S. economy from the coronavirus with the level of impact depending on the severity and length of its spread. The economic impact in other countries (especially China) has already been significant.
• China is a more significant player in the global economy than in decades past so the disruptions in supply chains have had a significant impact in countries that have not yet had a large number of coronavirus cases.
• For clients who are taking distributions from their portfolio, we set up a cash management system with amounts set aside in money market and short-term bonds to avoid having to sell during market downturns such as this.

We are not making changes to client portfolios at this time. History has shown that reacting to wild market swings by piling in during up markets or bailing out during declines can result in permanent losses of capital when the market does rebound (which it historically has eventually done). We have assisted our clients in setting an allocation to stocks that is appropriate to their time horizon and financial situation – this is the most important investment decision. We are currently underweight U.S. stocks in client portfolios due to very high valuation levels. As markets correct, valuations will become more reasonable and we potentially could increase U.S. stock allocations back towards normal levels.

As always, we welcome your questions or comments.

Douglas M. Lynch, CPA, CFA, CFP
John C. Lynch, CPA, CFA, CFP