The Coronavirus and Market Declines

The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is obviously unsettling on a human level as well as from the perspective of how markets respond.

It is a fundamental academic principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect, although sometimes the price movements are more than we would expect?.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy, as well as the obvious concerns on our wellbeing.

Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China. Airlines are preparing for the toll it will take on travel4. These are just a few examples of how the impact of the coronavirus is being assessed. Most nations are warning of a serious blow to their country?s economy.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower.

We can?t tell you when things will turn or by how much, but our expectation is that bearing today?s risk will be compensated with positive expected returns. That?s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008?2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.

If you would like to discuss your circumstances, please do not hesitate to get in touch with one of our advisory team on 01945 581937

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