As you all well know, global equity markets have experienced turbulent trade volatility due to the potential economic damage of the viral outbreak of COVID-19 in China and other countries around the world.
At Parrish Capital, we are aware of the potential near term risks. However, we feel you can learn a lot from past market performance during the onset of other infectious diseases, including severe acute respiratory syndrome (SARS), ebola and avian flu. If history repeats itself, committed investors may have little to fear that the pathogen will sicken a U.S. stock market that finished 2019 with the best annual return in years.
We are aware of the increase pace at which major risks and ‘black swan’ events can affect asset prices in today’s markets compared to 10 years ago for three key reasons:
- The social media driven news cycle
- The interconnectedness of global supply chains
- The white-hot stock market
Historically, however, Wall Street’s reaction to such epidemics and fast-moving diseases is often short-lived.
According to Dow Jones market data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April 2003. About 12 months after that point, the broad-market benchmark was up 20.76%.
SARS resulted in a total of about 8,100 people being sickened during the 2003 outbreak, with 774 people dying, according to data from WHO and the Centers for Disease Control and Prevention.
Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus — a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12-month period.
Data are similar for equity performance across the globe based on data from Charles Schwab tracking the MSCI ACW Index. The index has gained an average 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later (see graphic below):
As we mentioned in previous commentary, if it bleeds it leads. As long-term investors, we suggest you turn the TV off and focus on your core strategy. At Parrish Capital, our philosophy embraces the notion that time horizon and quality are the most important factors when investing in growth assets i.e. equities. We believe funds not needed in the next 3 to 5 years should stay invested in high quality equities. Assets that are needed within a liquidity window of 3 to 5 years should be invested in liquid, high quality intermediate term fixed income securities. By keeping funds needed in the next five years safe and liquid you reduce the need to sell in adverse markets which ultimately could prevent you from reaching your financial goals. If you have an adequate time horizon, the current volatility should be looked at as a buying opportunity.
Acting irrational due to emotions and talking heads in the media may cost you your retirement. The fact is you cannot time the market which requires two correct decisions: when to get out and when to get back in. History has shown that missing a handful of the best days in the stock market can drastically alter your long-term investment performance and ultimately your retirement goals.
Unlike many who may have had several sleepless nights this week, we want you to sleep well knowing that we are burning the midnight oil in search of value in the midst of this chaotic market. In the words of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful”.
We value the trust you have placed in Parrish Capital and look forward to continuing to serve you. As always, ignore the noise, stay focused, and may prosperity be yours.