Investors are living through perhaps the fastest sell-off of stocks in history. Since mid-February, markets dropped significantly as negative coronavirus news developed and governments wrestled with the situation. As of March 12th, the Dow Jones Industrial average had dropped more than 20 per cent and global markets had slid, with some entering correction territory. Not surprisingly, the Volatility Index (VIX) also known as the Fear Index, a real-time measure of both the stock market’s expectation of volatility based on the S&P 500 index option and investors feelings, has spiked dramatically. A look at a graph of the index at the time of writing reveals a straight line going up. This didn’t even happen during the financial crisis in 2008. And it’s predominantly due to the coronavirus or COVID-19.
It feels like the virus is giving the markets the reason they’ve been looking for to self-correct–something that hasn’t really happened in more than 11 years, the longest bull market in history. While words like panic and recession are running through countless media stories, it’s important for investors to step back, focus on your investment objectives, and if those objectives are to grow your wealth, take advantage of this great buying opportunity.
It’s not like we haven’t been through a health scare before. Markets have bounced back from viral outbreaks such as Severe Acute Respiratory Syndrome (SARS), Ebola and avian flu. Perhaps the biggest difference between those situations and what we’re experiencing today is the always-on news cycle that sees investors hit with coronavirus updates everywhere they turn; how linked global economies and supply chains are; and high-priced stocks. Let’s not forget 2019 gave investors some of their best returns ever. This recent dip may be an opportunity for the market to settle to a point where valuations are more realistic and reflective of corporate earnings.
Another key factor in the current market selloff: automated trading or investing by algorithm. These programmed trades are also reading all the negative headlines about coronavirus and selling. They are not looking at the fundamentals of the businesses behind the stocks or the fact that at some point, hopefully soon, we will get past the coronavirus.
This is not to suggest the coronavirus is not having an impact on business. Many North American and European businesses rely on China both for manufacturing and sales. Microsoft has reported its sales this quarter would be lower because its supply chain has been disrupted.1 Less reported was the fact that just its sales of Windows and Surface laptops would not meet expectations. The other parts of its business are fine.2
It’s important for investors to differentiate between revenue that is lost and will not be made back and revenue that will be delayed to future quarters. For example, if you buy a coffee from Starbucks every day and your Starbucks is closed because of the coronavirus, those sales are gone. You won’t be going back later when it reopens to purchase all the coffees you missed out on. If, on the other hand, you can’t buy an iPhone today because the Apple store is closed due to the coronavirus, you will just wait until it reopens and buy it then. For the record, early signs of recovery have led Starbucks to reopen 85% of its stores in China after temporary closures due to the virus.3
This is important for investors to remember. At some point, there will be a recovery for the markets. The question is when and what shape will it take?
My advice to investors looking to grow their portfolios: Stay invested and if you can, buy the best quality companies that have a dominant position in their industry. For example, Microsoft, Google and Facebook are among the biggest companies in the world and they are on sale right now. Unless you need money to live or pay down debt, there is no reason to sell. Consider this your reality check. Panicking is never productive–especially when it comes to investing and especially if you understand the markets will recover. That’s what they do. Long-term, you will make money if you stay invested. That is a fact.
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My approach to investing is straightforward. I study the markets, global economies and what’s happening within industries to be in a position to best help my clients find good quality investments that will help them meet their goals. I build custom portfolios for each client. I welcome you to call me at 416-332-3863 or email me at email@example.com.
- Coronavirus Fears Drive Stocks Down for 6th Day and Into Correction, The New York Times
- Microsoft doesn’t expect to meet sales guidance on Windows and Surface computers due to coronavirus, CNN
- Starbucks reopens most stores in China, citing ‘early signs of recovery’ from coronavirus, Business Insider