*This article originally appeared in RPAG News.
As of February 28, 2020, global stock markets have entered “correction” territory, defined as a 10% decline from the index high. This decline is in large part due to the uncertainty surrounding the new coronavirus, which was first detected in Wuhan City, China. The new coronavirus, named COVID-19, has now been recognized in 37 locations internationally, including the United States.
There will undoubtedly be an economic impact because of COVID-19. Growth is likely to slow due to quarantines, and there will likely be less consumer traffic and lower factory output. Still, the final results on global growth are yet to be determined. Stock markets, though, do not like uncertainty. As uncertainty has grown around this new coronavirus, the resulting fear has led to a quick and notable downward movement in the market.
Past Market Epidemics & Their Impact
Epidemics in the past have also led to sharp pullbacks in the markets. Over the long-term, however, the stock market has weathered past such epidemics. The chart below looks at the historical returns of the S&P 500 Index during multiple epidemics over the last 40 years. Over the 6- and 12-month periods following an epidemic, the S&P 500 performance has, on average, been positive
During times of uncertainty and market volatility, it’s typically prudent for plan participants to “stay the course.” Still, it is also prudent for them to review their investment strategies (e.g., “What’s my risk tolerance? When will I retire? When will I need this money?”) to ensure they’re on the most appropriate path. A new course of action is only warranted if it’s more appropriate than the current path.
Determining The Right Path for You
Evaluating one’s situation – having the most appropriate asset allocation or glide path and high enough contribution rates – can lead to the most positive actions a participant may take in saving for retirement. Bailing out of the markets and a retirement plan is typically an imprudent action. And exiting the markets is often detrimental to reaching future long-term retirement goals.
Data indicates that attempting to time the market generally proves futile for individuals. Current market conditions rarely provide a clear direction as to the future performance of the markets. The U.S. market, in particular, has been dynamic and resilient in moving on from crisis after crisis, throughout history.
The recent market volatility should remind plan participants to focus on what they should be doing regularly. Be mindful of the situation, but diligent about your investment strategy. Participants need to act in their own best interests while the stock market reacts to the current coronavirus and the uncertainty it brings – another bout of unexpected short-term market volatility.
And, if you have more questions about maintaining the course for your retirement, contact The Olson Group at 402.289.1046 or firstname.lastname@example.org.
Chart Source: First Trust (Bloomberg, as of 2/24/20. Month-end numbers were used for the 6- and 12-month % change. *12-month data is not available for the June 2019 measles. Past performance is no guarantee of future results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.)
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Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. The Olson Group and Cambridge are not affiliated.