Market Panic Is a Virus We Can Contain

A virus is spreading across the world and it is far less physically dangerous than the coronavirus. It is transmitted through the airwaves, news outlets, discussions in coffee shops and other social settings, and is observed in real time by anyone checking their 401(k) balances or their investment statements. This virus not only makes victims miserable, it is self-imposed. It is also misdiagnosed.

The U.S. stock markets have had their worst week since 2008, when essentially too much borrowing brought us to the brink of a depression. But for most companies, this is not 2008. Before you quarantine your investments, let’s examine what is going on.

Stock prices are bets on the earnings of companies far into the future. While earnings today will be depressed by the coronavirus because of short-term closings and restrictions, what is the likely long-term impact?

Companies that make things and people who buy them have three choices. Let’s use the panic over Tokyo temporarily running out of toilet paper because of hoarding as an example:

1) They can delay their purchases. The likelihood that people will no longer buy toilet paper when it is manufactured is slim.

2) They can make a substitution — some of which could be permanent. There will be a few items where permanent substitutions are likely (toilet paper not being one of them, unless there is a universal switch to bidets).

3) People can avoid buying completely. Impulse purchases may temporarily go away as people realize that they don’t need what they were going to buy. But impulse buying won’t go away forever, and one person’s impulse is another’s need.

The importance of this moment is that the coronavirus will affect this year’s earnings for companies, but not in the same way for different companies in future years. There may be some industries where the substitution could cause seismic shifts — other types of travel substituted for cruises, for example — but most industries will see little long-term effect as the entire world is motivated to recalibrate.

That doesn’t mean that all companies are equally inoculated. Companies with large current debt loads may have trouble making their payments and could end up being taken over or even having to file for bankruptcy. We are seeing some governments, specifically Germany, come to the aid of companies having liquidity troubles. We will continue to see more interventions.

COVID-19 will affect all of us in some way. As companies try to manage their cash flow, we will know people who have been laid off. We will hear of hourly workers who miss work due to illness struggling to meet their budgets. Our favorite servers at coffee shops and restaurants will see their income fall as more people stay home. Working from home creates a different type of socialization than working in an office environment, leading to a sense of disconnection. None of us are financially or socially immune from the coronavirus.

It’s important to be sensitive to those who are having financial difficulties from this. For those of you watching your portfolios fall, be careful trying to perform triage. You can bank on volatility as the news ebbs and flows. The challenge with selling out of the market is that you have to make a second decision of when to get back in. This is harder than the first.

Market corrections are uncomfortable and necessary. You can’t get returns without risk. That’s why money that is going to be spent over the next two or three years should be saved, not invested. But if you are a longer-term investor, rather than look at the current situation as a crisis, use it as a time to see whether you are comfortable with the risks you have been taking and whether opportunities have surfaced from this temporary meltdown.

While you may be feeling sick, take some steps to hasten your recovery. Just like you wouldn’t take your temperature every few minutes, stop looking at your investment accounts every few hours. Unless you are going to be taking action, there is no need for that kind of vigilance. Look at rebalancing your portfolio (which would cause you to sell bonds and buy stocks). If you have money that you want to put to work for the long-term, spoon some into the market rather than dumping it in all at once. And if you are on a regular investment program in your retirement plans, focus on the number of shares you are continuing to buy rather than their current value.

The symptoms from a falling market are uncomfortable, but they are not deadly.

Related: Maintaining Your Composure in the Face of COVID-19