The Coronavirus Correction – What’s the Game Plan?

The US stock markets entered correction territory today, off 10% from the highs on fears the coronavirus is spreading.  What should investors do?

First off, I have no idea what the market will do in the short term.  We could be bottoming, or we could go lower, I don’t know.  Be prepared for anything.

What I do know is this: Prior to the outbreak, the economy was growing.  Stock prices reflected this.

I know there will be disruptions to businesses, and it may be widespread.  The full extent is difficult to predict.

I suspect that the coronavirus situation will get worse, but will eventually stabilize and improve.  I also suspect that any recession caused by the coronavirus will be short-lived – once the major threat passes, economic activity likely will improve and resume growth.  A virus-caused recession would not be the result of excesses in the economy that need to be worked through before recovery, but one where people can’t get to work and consumers and businesses hold off spending temporarily.  I suspect the eventual bounce back will be sharp.

By the time that happens, it is likely the market will have bottomed.  In other words, if you try to time the bottom by waiting to deploy cash, or if you sell now and hope to buy back later when the outlook improves, there’s a significant chance you buy back higher if you wait until the virus impact abates.

So what to do?  The answer depends on your time horizon.

If you time horizon is a year or two, you shouldn’t be in the stock market anyway, regardless of the coronavirus.  Find a safer, less volatile place for those assets, because you don’t want to be forced to sell if we’re in the middle of a decline when you need the cash.

If your time horizon is long term, you will probably suffer volatility in the near term but you should stick to your long term plan.

It helps to understand what you own and why you own it. 

For example, think about the near and long term impact on some top stocks:

Apple may suffer in the near term as its Asian supply chain means they can’t produce phones at the rate they can sell them.  Stores may close, as has already happened in China.  Does this change Apple’s market share in hardware and their services lock-in?

Disney may suffer as people avoid travel and large gatherings such as theme parks and movie theaters.  Ten years from now, will people still flock to Disney parks, resorts and movies?

Amazon may suffer as consumer confidence plunges and retail spending declines.  Does this change their dominant position in online retail, or alter the long-term trends favoring online retail?

Visa may suffer as overall transaction rate declines in a global recession.  When activity resumes, will Visa’s position as the dominant payment network change?

Maybe you don’t like these companies, or you think they’re still very expensive, but the point is that near term shocks from the coronavirus – however severe – are unlikely to alter their long term competitive position.

Make sure your holdings have the strong business and balance sheet to weather this storm, and make sure you have the confidence in these companies to stick with them.  Impairments will be temporary, not permanent – unless the business lacks the balance sheet to suffer through the decline, or unless you sell out of fear and turn a temporary loss of capital into a permanent one.

There’s no reason to rush into the market but don’t panic either.  You don’t need to make all your decisions at once.  And if you don’t have cash, don’t be afraid to sell something to buy something else of higher quality.

As for timing if you are looking to buy, focus on price not the level of the overall market.  Is the price offered a good value compared to your assessment of a company’s long-term business value?  Be prepared to suffer a near term decline and keep your focus on long-term value.

Ultimately, we may be in for quite a ride in volatility, one we haven’t experienced for some time.  But if you keep your focus long term, and if you understand what you own and why you own it, you will be better prepared.