What We Know, What We Don’t Know
What We Know
Markets do not like uncertainty. There are lots of things that influence the pricing of equity markets, but uncertainty consistently drives volatility and declines in equity values. Since Covid-19 continues to have a great deal of unknowns associated with it, that leaves uncertainty.
When people are uncertain, they tend to take conservative actions. In addition to the investment markets, people take conservative actions in their own lives to protect themselves and their health in the face of the unknown about a virus. During past epidemic outbreaks, 20% of the economic decline was due to the actual medical impact, including loss of work. 80% was due to avoidance behavior. We are smack in the middle or even the beginning of avoidance behavior right now. The greater reactions to the lack of information is expected and not surprising.
There are two potential outcomes: the world will come to an end, and thus whatever you do right now will not really matter, or we will get through this and recover. I embrace the latter.
What is Likely True
While attending to economic matters is important, especially for those who face immediate lack of income, until investors perceive that the government/greater society has a better understanding of the virus, and effective actions are taken to address its risk, economic efforts will likely fall flat. Investors will continue to wait for the solutions to the harms caused by the virus.
The virus will either run its course through the population, or we as a society will get better information about the virus and craft a plan/solution to reduce risk. If the latter happens sooner rather than later, then the investment markets will likely recover sooner. If information about and solutions to the virus take a long time to develop, then likely it will take the markets a correspondingly long time to recover.
People are mostly rational. Once we have more information about the virus, then people will likely move forward according to reasonable recommendations. Without such information people typically act in a conservative fashion.
There are potential opportunities during these moments to invest at discounted prices.
What We Don’t Know
The timing of all of the above is uncertain, and we do not know when certain events will take place.
Since the timing is unknown, the impact on the economy is unknown. The longer everyday lives are suspended, the greater the economic impact.
So for many the question remains, what do we do? Often in a time of crisis, it is natural to think that action is the right course of events. Generally speaking for most, if nothing in your own personal life has changed and your investment goals remain the same, then continuing with the original course of action is the right step, which includes re-balancing when appropriate. For some it might even be time to consider whether getting more aggressive with investments is an appropriate next step. If you want to explore whether that is the right action for you, I encourage you to reach out to me, and we can discuss via online video or phone.
And you may wonder what the heck does a wild flower at the beginning of this post have to do with Covid 19. First, nothing technically, but I was tired of the image of the virus. But second, metaphorically it represents that even after the dead of winter, life and color re-emerge. And third, I like sharing the little discoveries I find during my walks in Edgewood Park.