On February 19th, 2020 – after a spectacular 44% runup that started the day after Christmas 2018 – the Standard & Poor’s 500-Stock Index closed at 3,386.15. Just a week later – on February 26 – the Index closed almost 8% lower, at 3,116.39.
We have therefore been invited by financial media to suspect that the blended value of 500 of the largest, best-financed, most profitable businesses in America and the world has lost eight percent – with more losses to come – due to the outbreak and spread of a new strain of coronavirus. We do not claim to have any idea how far this outbreak will spread, nor how many lives it will claim before it is brought under control. We are reasonably certain that many (or perhaps most) of the world’s leading virologists and epidemiologists are working on it, and we believe that their efforts will ultimately succeed. Clearly, this is nothing more (or less) than our personal opinion.
But if the rich history of similar outbreaks in this century is any guide, this would seem to be a reasonable guess.
We draw your attention to:
- SARS in 2003-04, also originating in China
- The bird flu epidemic in 2005-2006
- In 2009, a new strain of swine flu
- The Ebola outbreak in the autumn of 2014
- The mosquito-borne Zika virus outbreak in 2016-17
Without belaboring the point: the super-spreader of SARS – a fish seller – checked into a hospital in Guangzhou on January 31, 2003, basically infecting the whole staff. The epidemic exploded from there.
On that first day of the litany of epidemics cited above, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), the Index closed yesterday at $3,116.39, more than 3.5 times higher. We are confident that you see where we’re going with this.
The (apocalypse du jour) situation will continue to play itself out, as have all the numberless crises that have gone before it. The exhibit below shows performance of a balanced investment strategy following a few historical crises. Each crisis is labeled with the month and year that it occurred or peaked. The subsequent one-, three-, and five-year annualized returns start from the first day of the month following each crisis. Although a global investment strategy would have suffered losses immediately following most of these events, the financial markets recovered over time, as indicated by the positive five-year cumulative returns. Negative events such as these may tempt investors to flee the financial markets. But diversification and a long-term perspective can help us apply discipline to ride out the storm.
It remains impossible to predict when and how this problem will be resolved. Financial media persist in reporting this as an unprecedented crisis in the economic, financial, and medical spheres, and suggesting that it is effectively insoluble. Neither contention is accurate in our judgment, but that isn’t why we’re writing this today. Our purpose is simply to suggest that- difficult as it may be- we take our focus off the catastrophist headlines and put it where it belongs: (a) on your goals, (b) on our long-term plan for the achievement of your goals, and (c) on your portfolio as the long-term funding medium for that plan. We have elected to be guided by history as opposed to headlines. So when people say “This time it’s different,” we respond instead with “This too shall pass.”
As always, we welcome your inquiries around this issue. In the meantime, we think the most helpful – and certainly most heartfelt – investment advice we can offer would be that you turn off the television set.