Coronavirus

 The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.  Global markets have suffered dramatic corrections over the last few weeks but, amid the anxiety, decades of financial science and long-term investing principles offer guidance.

It is a fundamental 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.

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

 

Just take a look at any airline and you will see how the impact is being assessed.

 

https://www.wsj.com/articles/germanys-lufthansa-makes-cuts-as-it-braces-for-coronavirus-impact-11582712819.  Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020.

 

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.  Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

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.