The CDC announced today that Americans should expect the Coronavirus to spread to the United States…and… the Dow promptly dropped another 3%.
Based on my experience, I think more may be at work here than scary headlines. The Dow was up nearly 25% and S&P 500 gained 30% last year. This was during a year that few market watchers thought the market would gain much ground at all. And as the market chugged higher, Investors became more confident and quite sanguine on the state of the economy in general.
But investors should keep in mind, we’re are at a point very late in the cycles for both the stock market and the economy. In other words, we are due for a recession.
It is most common for the market to peak and start to decline before a noticeable drop-off in the economy. The market has just quickly pulled back 6% on global pandemic fears. Given the late stage–both of the economic expansion and the bull market in stocks–my experience suggests that the market is going to take this opportunity to pull back and re-evaluate. What I mean is that I expect the market to be volatile for a period of several months. During this period, I expect some big swings–both up and down–as the market finds its new fair-value range.
The danger during prolonged periods of market declines and volatility is that investors can start to re-think long held beliefs about investing. They lose confidence and seek a more promising alternative to the stock market–usually at just the wrong time. It’s human nature.
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