If the coronavirus is shaking your faith in stocks, you need to keep reading this article.
Why? There are three reasons.
Reason 1: This Selloff Is a Total Aberration
Pretty much every previous correction in the stock market had a financial or economic cause. The 1929 crash, for example, resulted from too many people buying too many stocks on margin.
Black Monday, October 19, 1987, was tied to a new product called “portfolio insurance.” In 2002 you had both the tech bubble deflating and a recession. The 2008 financial crisis stemmed from years of reckless mortgage lending.
Most of those earlier crashes had warning signs. Employment might have weakened beforehand. Credit spreads might have widened as companies struggled to pay debts. Or the market might have stopped making new highs as buyers slowly disappeared.
In other words, don’t blame the stock market for going down. If anything, you should give it credit for appreciating the magnitude of this crisis before everyone else.
Reason 2: Coronavirus Shows the Market Works
The last day has seen a wave of closures. The NBA suspended its season. NCAA tournament games will play to empty arenas. Madrid shuttered its museums. San Francisco prohibited large gatherings. President Trump banned flights from Continental Europe.
This comes as a shocking blow to the ordinary public, which a few days ago shrugged at the outbreak. Most politicians also failed to see it coming.
But, the stock market saw it coming three weeks ago. This demonstrates yet again that financial markets work. They price in events and risks before anyone else.
This should inspire confidence in the market. Yes, the losses are painful. However, at a time when politicians and health officials hesitated, the market worked.
Reason 3: Technology Stocks May Ultimately Benefit
The biggest decliners since the outbreak began have been energy stocks, airlines, metals and banks. The good news is that these sectors aren’t particularly important in the big scheme of things.
Technology remains the backbone of this market: companies like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN) and Nvidia (NVDA).
We’re now seeing a shift toward employees working from home. Traditional shopping centers, already struggling, will lose even more foot traffic. People may even migrate away from big cities like Seattle and New York.
That will all require more connectivity, more software and faster networks. That will translate into more cloud computing, more e-commerce and more investment in technology. Over time, technology companies may benefit.
In conclusion, the coronavirus crash is a true aberration or “black swan.” It will unfortunately cause more suffering and deaths. However, over the longer-term the market will survive and recover. Now is definitely a time for caution, but not despair.