Fears from the spreading Coronavirus caused turmoil in the financial markets last week. The S&P 500 dropped 11.5% and is now down 8.5% for the year. Non-US stocks fared slightly better, with the MSCI ACWI-Ex US down slightly more than 8% for last week. While losses of this magnitude are normal over the course of any year, a loss like this in one week is not normal. Thus, we wanted to give you our thoughts.
We, along with many other professional investors, feel that the financial markets are overreacting. We do not believe that fears of the Coronavirus alone warrant a change in our investment approach. Markets have faced several health epidemics over the past decade – MERS in 2013 and Ebola in 2014, in addition to SARS back in 2003. Historically, these viruses have caused disruptions in economic growth and volatility in the stock market until there was a “light at the end of the tunnel” regarding control of the outbreak. After that, there was a snap back in economic growth and the financial markets. We believe there is a high probability the same thing will happen with the Coronavirus impact. We receive frequent updates from our managers in China who are close to the center of the situation.
I also want to re-emphasize that losses of this size are to be expected and temporary in nature. Even last year when the S&P 500 was up 31% for the year, it experienced a 7% loss during that time period. The chart below shows several events that created anxiety in the financial markets over the past 10 years. You can see that while there are many ups and downs, the long-term investor was rewarded.
While it remains unclear how dramatic an impact the Coronavirus will have on global economic growth, we have and will always continue to be long-term investors focused on long-term results. In a time like this, it’s important to remember the critical role diversification plays in the context of a holistic investment portfolio. High-quality assets such as investment grade corporate and municipal bonds produced positive returns last week as investors sold equities and riskier high yield bonds. Many of our underlying managers used last week’s selloff opportunistically to find value and deploy excess cash. Our equity portfolios are positioned conservatively when compared to the broad market and we expect them to provide downside protection in times of market stress, as they are designed to.
You can reach out to our team using contact us or to anyone who serves you from our firm if you would like to discuss further.