Is Timing the Market Around Coronavirus a Good Idea?

Efforts to Contain the Covid-19 Disease

In late February, concern that efforts to contain Coronavirus Disease 2019 (a.k.a. COVID-19) might result in slower global economic growth disrupted global markets. Share prices fell as economists and financial analysts revised growth expectations, and investors worried about the possibility of recession. 1, 2

Efforts to contain the virus have included quarantines, factory and school closings, and trade show cancellations, reported Financial Times. These measures have slowed productivity in nations where they occur and elsewhere. For example, many American companies rely on raw materials and parts from overseas to produce goods here. When supply chains are interrupted, profitability may be hurt. 1, 2

Consumer-oriented businesses like restaurants, entertainment, and travel companies also have been affected. Since consumers are the primary driver of economic growth in the United States, any event that slows spending has the potential to slow growth, reported MarketWatch. If consumer confidence is dented, growth could slow further. 3

The good news is the majority of COVID-19 cases appear to be quite mild. The Director-General of the World Health Organization (WHO)reported COVID-19 appears not to be as deadly as other coronaviruses have been, such SARS and MERS. Based on information available at the time, WHOestimated eight out of 10 cases will be mild. 4

Volatility Creation Grows

All of this recent activity has created significant volatility in the market and wild swings on a daily basis and so the question becomes, should you wait out this volatility and sit on the sidelines waiting for it to calm down? Well, anyone who reads my articles should know the answer to this already which is a resounding NO!

As I have said many times before, it is 'time in the market not timing the market' that makes the biggest difference on your investment returns and it is also typically why do it yourself investors tend to underperform the markets and good investment advisors. The reason for this is that in order to make good investment decisions you typically need to ignore your own human nature.

Good Follows the Bad

Even for an experienced Portfolio Manager like myself, I will admit, when the market is dropping over 10% in a week, I get a slight feeling that I want to sell out of this and avoid any more pain. This is where my experience kicks in and reminds me that often the best days in the market occur immediately after the worst days. I also know that if you miss even just a small number of the best days over an extended period of time that you could be missing out on years of investment returns that are required to make your financial plan successful.

For example, according to JP Morgan, if you take the S&P 500 over the course of 20 years ending on December 31st 2018, and had you missed just the 10 best days of to invest over that time, your average return would have dropped from 5.62% per year down to 2.01% per year. Essentially your returns are 60% lower than had you just stayed invested the entire time. What they also found is that if you missed just the 20 best days over 20 years, your annualized return was in fact negative. Here is their complete chart:

In the current environment we have seen some extreme selling and buying due to concern over just how far Covid-19 will spread and what will be the potential impact on the global economy. It's undoubtedly clear that the short-term outcome is going to be bumpy and it's likely that we will see continued volatility, however, it is still very unlikely that anything going on today should impact our long-term approach.

History is also on our side as in the aftermath of past epidemics including SARS, Swine Flu, and Ebola, we often see double digit returns in the following 12 months after the virus was discovered. Could Covid-19 be different? Sure, it can, but what is still clear is that trying to time the market has been an ineffective strategy and is likely to continue to be going forward.

- Grant White, CIM, CFP

Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families. This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities.

The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

Sources:

1 https://www.ft.com/content/e0a8cf67-896e-3b0c-89ce-03e43581008d (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Apr_2020_FinancialTimes-Coronavirus-WHO_Escalates_Risk_Assessment_of_COVID-19_to_Very_High-Footnote_1.pdf)

2 https://www.axios.com/coronavirus-recession-warnings-9eb743aa-2fd2-47ac-9e85-19ff54a07d3c.html

3 https://www.marketwatch.com/story/consumer-spending-is-still-rising-steadily-but-coronavirus-looms-as-potential-brake-2020-02-28

4 https://www.who.int/dg/speeches/detail/who-director-general-s-remarks-at-the-media-briefing-on-covid-2019-outbreak-on-17-february-2020