Marshall Bolden, CFA®, President

March 2, 2020

Given the sharp increase in market volatility and the stock market declines over the past several days, many clients have understandably been concerned. While we cannot predict what the markets will do moving forward, we do want to provide some thoughts and commentary regarding the current situation.

Markets hate uncertainty, and there is currently a lot of uncertainty around the spread of coronavirus and how this will impact economic growth rates and corporate earnings. As the virus has moved outside China and established outbreaks in other countries, fear and uncertainty have grown. This is coming at a time when equity valuations, particularly in the U.S., were higher than average. This combination of factors has led to sharp pullbacks in the equity markets. From its closing level on February 19, the S&P 500 Index declined nearly 13% through February 28. The last week was the worst week for many equity markets since the 2008/2009 financial crisis.

It is too early to speak with any certainty regarding the ultimate reach of the virus and how this will affect various economies. We do expect volatility to remain elevated in the short term as the reach of the virus continues to expand and as various governments, agencies, and industries react to this. However, this does not necessarily mean the equity markets will continue to decline steeply. As already mentioned, the short-term market movements are a guessing game, but we do have historical data related to previous periods when pandemics occurred. JP Morgan Asset Management has reviewed S&P 500 returns related to the SARS, swine flu (H1N1), bird flu (H7N9), Ebola & MERS outbreaks. This data shows an average max drawdown of less than 10%, that one month after the outbreaks the average return is nearly flat, and that 6 months after the outbreaks the average return has been above 10%. In other words, the drawdowns or market declines in similar past events have not been prolonged events, and the S&P 500 has normally been higher 6 months after an outbreak than it was at the beginning.

Volatility and market declines inevitably cause emotions to increase. The urge to sell, reduce risk, or generally take action rises. Behavioral finance has told us this for years. There is also plenty of actual, historical data that points to the impact of quick, emotions-based decisions. Outcomes of such decisions are often detrimental to investor’s returns and probability of reaching their long-term goals. This makes sense. Our emotions normally scream to sell or reduce risk when the markets begin to fall, and once the markets have been up a while and/or are more stable, they tell us to get back in or to increase risk. Doing this often results in selling low & buying high…the exact opposite of the investment idiom that says to buy low & sell high. The reality of investing is that very few, if any, people can accurately and consistently predict short term market movements. Therefore, we will continue to stress long-term investing and for investments and risk level to be determined in light of a long-term plan. This linked video commentary by Kara Murphy provides further insight regarding recent market events and the importance of investing within the context of a long-term plan. Kara is the Chief Investment Officer

Investment advisory services offered through CapSouth Partners, Inc., an independent Registered Investment Advisor, dba CapSouth Wealth Management. CapSouth Partners does not provide tax or legal advice. Please consult your tax or legal advisor prior to making decisions which may have tax or legal consequences. Past performance is no guarantee of future results. Information contained herein is believed to be reliable but is not guaranteed as such by CapSouth. Nothing contained herein should be construed as individual investment advice; all commentary is of a general nature. This commentary contains opinions; any opinions presented should not be construed as fact and are not in any way a guarantee of future events.