This weekend we had news of another coronavirus variant named Omicron. The stock market reacted with the broad stock markets down over 2% on Friday. After 20 months of volatility in the stock market, what does this new coronavirus variant mean to your portfolio? Let’s take a look by answering a few questions:
How did the markets react to Covid-19 over the past two years?
The first time Coronavirus made headlines was in February 2020; the stock market dropped 30% in 22 days. The country was shutting down and lost over 20 million jobs seemingly overnight. Not to mention, toilet paper was the most prized possession! Since then, the government has passed multiple stimulus bills, and the S&P gained 112% since the bottom in March 2020.
Why is this different?
According to a report by U.S health data company IQIA, total spending on covid-19 vaccines is projected to reach $157 billion by 2025. As the saying goes, knowledge is power. These pharmaceuticals continue research and development to combat this virus. As of Nov 24, 2021, 69% of Americans have received at least one vaccination, leading to more economic growth from people feeling safe to go out and spend. It also appears both local and federal governments are against complete shutdowns, which should keep the economy moving now that we have experience with this type of virus.
What does it mean in the short term?
In the short term, Omicron headlines will continue to dominate the headlines while researchers and health officials work to determine the effect of Omicron. While the short-term volatility and supply chain issues will continue, the long-term view is where investors should focus.
What are the long-term effects of this?
Think about these two facts:
10% market corrections happen once every 1.8 years.
20% market corrections happen every 3.6 years.
It has now been right about 1.8 years since our last 10% correction. While it’s not something investors enjoy going through, it is entirely normal to see pullbacks like this. During pullbacks, you should be looking at the following:
Does your portfolio match your risk tolerance?
You should evaluate your risk tolerance every couple of years. As your life changes, so should your portfolio. If you haven’t reviewed this in the last few years, now is a great time.
Is your plan opportunistic? (Investing cash on the sideline while stocks are down)
Like Warren Buffet said in his 2008 letter to shareholders, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” When stocks appear marked down, it’s a great time to put some of that cash to work. While a 2% drop like we saw Friday doesn’t start to scream cheap, it is good to keep an eye on quality companies over the next few weeks and months.
Having a nice cash cushion
Emergency savings during a market downturn can help give you safety, security, and flexibility. While six months of emergency savings are widely recommended, we recommend two years since recessions, on average last 11 months. Withdrawing from your portfolio when stocks are going down is not ideal. Emergency savings can replace portfolio withdrawals during volatile markets, so you don’t have to sell your position for a loss. Instead, you can allow that ownership to collect dividends and gain a larger position in companies while you wait for the market to turn around.
The Coronavirus has changed how we live our lives with supply chain issues, employee covid testing weekly, and political debates around mandatory vaccinations. While this new Omicron variant leads to some unknowns, history can help guide us through this. Market corrections are part of the stock market, and this is just another bump along the way. Keep focused on your specific financial plan, and be sure to review those three topics.
If you would like a financial plan that factors in recessions and market pullbacks, please reach out to a financial advisor. A financial advisor should also stress test your portfolio to make sure it can withstand different types of market conditions.