I don't need to tell you that the stock market went down by 12% this week (and still counting). By now, we've all heard about the Corona virus. On top of that, however, I think we should note that we're at the end of the longest continuous bull market in history. Yesterday I read in the Wall Street Journal that the market has gone up for 131 months, almost 11 years, without a correction of at least 10%. That's amazing.
I think that both of these factors in combination explain the speed and depth of this sell-off. I have a hunch that the second factor - the long bull market - has more explanatory power than the first. In my experience, markets move more sharply over somewhat obscure technical and economic factors - think of mortgage defaults or rising and falling interest rates - than they do over news headlines such as a virus. In this case, it's safe to assume that both factors are at work.
I'm no medical expert, and I sure don't want to catch the virus myself, but if I do, I'm sanguine enough to think that I will be part of the 99% who survive. You should think that way also. I read that new cases in China have plateaued off, and that the Chinese are anxious to get back to work. This halt in productivity, though painful to everyone, has been most painful to them. Normal life will resume and our economy and markets will resume their upward trajectory.
Neither am I good at guessing the next direction of the stock market. Eventually it will go up again, I think sooner rather than later. The problem with stock markets is always the same. They make their own bad news. When the markets go down, as they have done this week, investors everywhere feel poorer. "Oh-oh," they say, "a recession's coming." They reign in spending and tighten their belts. Perhaps they cancel a vacation. Companies feel the pinch and do the same. This has the cumulative effect of further damping economic activity, lowering profits, and leading the stock markets lower yet. It happens every time, and (partially) explains why markets behave in such zany fashion, far exceeding in their swings any rational attribution to current events.
Happily, though, human ingenuity is such that things will get better, as they have always done. Governments will respond. Central banks will lower interest rates. We will isolate the virus and develop a vaccine, or at least a flu shot. Those of us who catch the virus will almost all recover. If you hold solid companies and good funds in your portfolio, then you can confidently assume that they will continue to work their magic, and that your portfolio will resume a path of growth in the not too distant future. Hold on to this thought. It will help you to remain invested through difficult market conditions to better times ahead.