When the rumblings of coronavirus as a potential global pandemic hit the world in early February, most investors were nonplussed. Even in late February, when the stock market began to react adversely to the increased spread of the virus, many economists predicted a short but sharp downturn in the market, followed by a lengthy recovery period. Troubling, perhaps, but nothing to lose sleep over.
Now, in late March, the Dow dropped 900 points in one week, and Wall Street just had its worst week since 2008. The market doesn’t look as if it’s due for an upswing anytime soon either. Coronavirus cases across the world are rapidly rising. For countries like the U.S. that failed to actively combat the virus, the battle against COVID-19 is just beginning. Understanding how we got to this point and what the future impact of the coronavirus on the stock market will be is vital for any investor.
Is the market overreacting to the coronavirus?
Any experienced investor or economist will tell you fear is the stock market’s Achilles heel. As soon as the market starts to decline, investors fearful of losing money start to sell high-risk assets and invest in low-risk assets like stable-value or principle-protected funds. As investors notice others selling, they’re likely to follow suit, starting a spiral that rapidly tanks the market.
Since herd mentality often drives the impact of fear on the market rather than logic, investors are quick to assume the market is overreacting when fear affects it negatively. When coronavirus was first affecting the market, economists hypothesizing the market was overreacting were a dime a dozen.
At a certain point, whether or not the stock market is overreacting to a specific element (like coronavirus) becomes immaterial. If enough investors panic and sell off stocks out of fear, the impact on the market is equivalent to investors selling off stocks justifiably. What is impacted is recovery time. If the stock market is genuinely overreacting, its recovery period should be shorter than a market that’s truly tanking.
Unfortunately, it seems increasingly likely that the market isn’t overreacting to the coronavirus. We’re closing in on a month of bloody Mondays for the stock market, and there’s no end in sight. Across the world, markets are reacting to the coronavirus as they would a recession or depression.
Why is the coronavirus affecting the stock market so negatively?
The virus is catastrophic for labor and service jobs. In cities like Los Angeles, where mandatory stay-at-home policies are in effect, the city and county governments want all “non-essential” businesses to shutter their doors. That means retail stores and restaurants (except for takeout-only policies) are out of revenue for a significant amount of time. Organizations like schools are also shutting down.
Despite potential stimulus packages from the U.S. government coming into effect soon, many small and medium-sized businesses that already operate in the red will close their doors forever due to the coronavirus. Millions of workers across the U.S. are projected to lose their jobs. As workers can no longer inject money into the economy, companies will increasingly fail to meet revenue projections. Apple already announced that it would fail to meet its Q2 revenue projections due to how the coronavirus has impacted the company’s manufacturing facilities.
The U.S. government is already closing in on a massive $1.6 trillion stimulus package that aims to provide businesses with enough capital to avoid mass layoffs and aid sick workers until the market starts to recover. It may be one of multiple stimulus packages we see during this crisis. However, whether or not these stimulus packages will genuinely be sufficient to prevent the market from crashing further remains to be seen.
Should I sell my stocks?
There’s no fast and easy answer to this question. Whether or not you should sell now mostly depends on how long you’re willing to wait for the market to recover.
Most economists predict the market will bottom out long before the threat of the coronavirus has passed. The coronavirus outbreak will probably come in waves and could last as long as 18 months. The stock market will probably regain some steam once the first wave of the virus has passed, but investors are in for a lengthy recovery period throughout this outbreak.
Selling in a bottomed-out market won’t get you the best bang for your buck. If you’re in this for the long haul and don’t depend on your investments financially, staying in the market is probably the right call. Investing now, while stocks are cheap, could pay off handsomely in a few years. However, retirees who depend on their investments for financial security may want to cut their losses and sell off high-risk stocks to invest in more low-risk assets.
If you own a small or medium-sized business that’s struggling right now due to the coronavirus, we can help. HJR Global specializes in helping businesses reach their full potential through investing and consulting services. To learn more, contact us.