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Stock market plunge and coronavirus

Stock market plunge and coronavirus

In this world you will have trouble. But take heart! I have overcome the world” – John 16:33

Dr. Erik Davidson, CFA, is Chief Economic Advisor at Inspire Investing. | (Courtesy of Inspire Investing)

While the Bible does not speak specifically about Coronavirus outbreaks or stock market plunges, it certainly does speak about plagues and pestilence as well as periods of adversity and trouble. So, with that in mind here are some thoughts on the recent stock market sell-off from the vantage points of investment history, behavioral finance, and biblical wisdom.

In my many decades of investment experience, I have seen my fair share of market turbulence and even many “crashes”. During my career, there have been all matter of reasons to spark stock market sell-offs, however, this is the first time in my experience that a pandemic scare has been the catalyst for a significant stock market plunge. Yes, in the past, investors have expressed worries about health-related issues (Ebola, SARS, etc.), but nothing medical that I can remember has had the sort of impact that we are currently seeing. Not being a medical expert (although I am a “doctor”!), from my limited perspective, it seems that the pandemic concerns have legitimacy and therefore the potential to cause significant human and economic damage. While we may have some feelings of despair in the face of this challenge, as Christians, we can pray with confidence to God that the coordinated global forces of human ingenuity being brought to bear on this calamity will prevail.  Even with that envisioned success, however, going forward, this new type of risk, global health, will now be a top of mind concern for investors for years to come.

While most importantly caring for and praying for those who have been afflicted (“Weeping with those who weep”, Romans 12:15), prudent investors nevertheless do need to consider the market implications of this medical emergency.  Stock market corrections (generally viewed by investors as the S&P 500 being down -10% from the prior high) are very common, coming on average every 11 months. Bear markets (generally viewed by investors as the S&P 500 being down -20% from the prior high) are less frequent, but still have visited investors on average every 44 months. With that context, it is important to remember that this 11-year bull market has been the longest in the history of the US stock market. That combined with recent all-time stock market highs, stretched valuations, record low bond yields, anemic economic growth, polarized political environment, and weak earnings growth, the probability of entering a bear market is material.

However, just because there is a heightened risk of a bear market, that does not mean that investors should reflexively “bail out”. Biblical wisdom certainly supports keeping one’s cool in the midst of adversity (“Do not fear, for I have redeemed you; I have summoned you by name; you are mine.” Isaiah 43:1). Further, while not directly addressing investment timing decisions, the Bible has many admonitions about making predictions and attempting to know the time and place of events.

Additionally, the evidence of financial history demonstrates that a strategy of “timing” the market by getting out when the market appears to be trending down and then attempting to adroitly get back in when the markets appear to have bottomed is fraught with risk, not the least of which is the necessity of being “right” twice. Additionally, Research studies from Dalbar indicate that while the historical annualized return of the stock market (S&P 500) over the past 30 years (ended 12/31/18) is 10.0%, the average mutual fund stock investor return during the same time period has been just 4.1%. The biggest contributor to that underperformance differential being investors’ failed efforts to “time” the market, oftentimes being sucked into the market’s euphoria near market tops and “buying high” while subsequently succumbing to despondency near market bottoms and “selling low”.

So, what is a biblically responsible investor to do in these circumstances? If an investor has a longer term (> 5 years) financial goal(s), then continuing to have a meaningful level of one’s asset allocation in the stock market is a prudent strategy despite the current market turmoil. In fact, further stock market weakness would likely be an opportunity to deploy more money into equities, i.e. buying low when stocks are on “sale”. Further, investors should consider the current market dislocations as an opportunity to “rebalance” their portfolios by trimming down slightly those assets which have performed better (e.g. bonds) and redeploying those proceeds into the recently beaten down asset sectors (e.g. domestic and international stocks as well as commodities). Lastly, and most importantly, biblically minded investors should strive to keep these heartfelt concerns of life in their eternal perspective, incl. John 16:33’s “I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world.”

Dr. Erik Davidson, CFA, is Chief Economic Advisor at Inspire Investing.