The impact of the coronavirus on the stock market is immense. It is scaring the stock markets. The Dow Jones Industrial Average (DJIA) lost 12% or more than 3,000 points over five days from February 24-28, the biggest 5-day drop since the Great Recession. The DJIA recorded the largest single-day drop (1,191) during that week on February 27.
China is a key player in the supply chain of companies. That is why analysts fear that companies in China will not deliver spare parts to companies like Apple and Walmart, which will hurt the results of these companies. The fear of the unknown is causing panic. Stock markets hate uncertainty, and this virus comes with a great deal of uncertainty: When will there be a vaccine? How will countries, etc. contain it?
The impact of the coronavirus on the stock market could persist
No one knows how long the stock market shock of the coronavirus will last. But history shows us that stock markets overreact and then continue their bullish momentum. Today, the rapid proliferation of the virus increases fear, which is why people overreact. We need to pause and not rush to the exit.
Markets quickly recovered from previous viral outbreaks. Will the impact of the coronavirus on the stock market lead to a realized capital loss? Market change, per se, does nothing. You lose funds only when you sell below the market price. The results of some companies will suffer in the short and medium term due to insufficient inventory. Other companies will benefit. Although we do not know the severity of the virus, judging from past market responses, caution is the key answer.
Are you a value investor with specific companies in your portfolio? Examine your goals and stay on track unless you see changes in the intrinsic value of the company. Have you been speculating, looking to make a quick buck with a margin account? If so, you will have a challenge because the banks will call your margin. That is the inherent risk when you use a margin account to speculate.
If you are not a speculator but a value investor, now might be the perfect time to identify value stocks and select those at bargain prices. There will be several. Whoever you are, be careful, reject the herd mentality and reflect on these matters:
Stay the course
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Review or develop an investment goal and plan before adjusting your portfolio. Why have you been or do you want to invest? Your reason will decide your investment strategy. My preferred strategy is to buy first-class stocks with a long history of growing dividends. I have these actions, I review their fundamentals from time to time and I act when there is a permanent change.
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You will find valuable stocks today. Market fluctuations provide a great opportunity to buy solid companies with a good track record. Remind, lose or win only with the sale, not when markets fluctuate.
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When the intrinsic value of your investments changes, confirm your strategy and sell your shares, even at a loss; whose market recovery time. The market could be down for several years like the Tokyo Stock Exchange, which has been below its bubble heights for more than two decades.
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Don’t let generic asset mixes influence asset allocation between stocks, bonds, cash, and commodities. You are unique and your mix must adapt to you at the stage of your life. Think before you rush to so-called safe-haven commodity assets, like gold, which have no intrinsic value.
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If you are in the red zone of retirement, Five to seven years to retirement, your goal should be capital preservation, so avoid the stock market.
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Don’t panic: focus on your goals, plan, long-term strategy. Update them and make sure they fit your needs and your risk profile.
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This too will pass, but only God knows the moment.