A Quick Look Inside the Stock Market: The Most Wild Week of the Century
March 19, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial
When taking a look at the past two weeks, the word “wild”, to say the least, is definitely putting things lightly. According to the Center for Disease Control, the spread of COVID-19 (Coronavirus) has already had affected more than 150 nations around the world. Naturally, with countless events being cancelled and many businesses being forced to close their doors, the entire global stock market and economy has experienced some backlash as well.
In the United States, the Dow Jones Industrial Average—widely considered one of the easiest ways to take the market’s temperature—has fallen by more than 10,000 points, losing about one-third of its value in less than one month. The S&P 500, another major index, has also lost a similar portion of its value.
The rest of the global economy has not really fared any better. In Italy, where the outbreak of the virus is arguably the worst in the world, most major indexes fell by 40 percent or even more. With great amounts of uncertainty surrounding both the markets and the combat of the virus itself, it can be very easy for both new and experienced savers to begin to panic.
How has Coronavirus Affected the Global Economy?
As we have discussed in previous articles, there have been many instances (such as 1975) where indexes fluctuate in value, yet the broader economy (as measured by GDP) remains unaffected. However, it seems that the outbreak of coronavirus will almost certainly have lasting impacts on both markets as well as the broader economy. According to Forbes, 2020 is posed to be the most volatile year in history.
Beyond the drops in the stock market, coronavirus has already put thousands of people out of work, either temporarily or permanently. Many of these people are spenders who fuel the economy and, without a clear source of income, decreased spending has already had some rippling effects felt around the world. While the government has hinted at an upcoming stimulus package and the Federal Reserve has decided to lower interest rates (encouraging more money going to spenders), the economic impact of the virus is still being felt around the world.
Furthermore, these recent trends have dramatically altered the demand for oil, which, on March 18, dropped by an almost unprecedented 24 percent (according to the Wall Street Journal). Increased border controls and various measures limiting international trade and travel have also had rippling effects that will be difficult to overcome, even once these measures are ended. The average 401(k) has lost roughly 15 percent of its value over the course of the past month, which certainly makes many people grim about saving for the future.
How Can I Continue to Grow My Wealth During Periods of Economic Decline?
After looking at all the facts and figures mentioned above, it can be easy to be pessimistic about the current situation and abandon or pause saving altogether. However, while this may be tempting, there are actually quite a few things you can do to increase your wealth, even if the market continues on with its bearish trend.
In situations of economic uncertainty, it is wise to review your true risk tolerance. Risk tolerance has two aspects. The first is an assessment of how much risk you are psychologically willing to accept in your investments. The second is how much risk you should accept based on your financial position, including your time horizon. The two levels of tolerance can be very different. Read more on risk tolerance here.
A diverse portfolio can also help protect you from the risk of the unknown. While these investments may not be as exciting as jumping into an exceptionally volatile stock market, they can still give savers some options that can help them weather any storm.
Additionally, it is important to remember that, due to Wall Street’s tendency towards positive feedback cycles, these recent changes likely demonstrate somewhat of an overreaction. Markets may very well stay down for a while, but once COVID-19 is effectively contained, they will likely rebound and offer some opportunities for short-term gains. Though the effects of H1N1 (swine flu) and Ebola were not as significant as the current outbreak, when both these diseases began to spread, markets temporarily dropped and then gradually recovered, eventually reaching new highs.
When saving for the future, it is important to know that market adjustments—and outbreaks—are seemingly inevitable. Rather than “zooming in” and focusing on a particularly bad event, it is better to zoom out and look at your savings plan with a comprehensive perspective. It is important to maintain the perspective of focusing on what we can control and we definitely do not control the markets.