One day the market’s up. Then next day, it’s down. Sometimes those ups and downs all happen in a single day—and get entangled in news such as the spread of coronavirus to more than 50 nations.
As an investor, you should expect some volatility and bumps in the road.
Spreading viruses are scary. But market fluctuation isn’t necessarily all negative.
Volatility isn’t just markets dropping. It's movement. Markets can—and have—moved down. But volatility means they can move up, too. Lately, they’ve been dropping. Here’s why:
- Growing fears over COVID-19 (coronavirus) as it continues to spread have been affecting the markets—due mostly to concerns about the impact to global supply chains.
- China, the epicenter of the outbreak, has grown as part of the global economy, so the impact is more extreme than similar previous issues, like SARS in 2003.
But remember the bigger picture: Market volatility now doesn’t necessarily imply negative market returns by the end of the year.
Main sources of market volatility
“There’s a lot of noise out there, but two main sources of uncertainty usually drive market volatility: interest rates and economic growth,” says Bob Baur, Ph.D., chief global economist for Principal Global Investors.
Think of interest rates as the price of money. When rates go up, businesses pay more to borrow money they need to expand and grow. And when rates are lower, it’s cheaper for companies to get the money they need. That interaction makes interest rates an important factor for investments because of how investors perceive the impact on economic growth.
Typically, when interest rates go up; markets reacted with a lot of volatility because they were worried that higher rates would cut off economic growth. When interest rates go down, markets take this as good news because it means borrowing costs are lower, potentially allowing growth to continue.
This is the engine that drives most companies’ earnings, so it affects investments, too. When investors worry that economic growth is slowing (such as during the current spread of coronavirus), markets can move lower, expecting a period where the economy could shrink.
Market volatility—even in the face of coronavirus—is nothing new
Volatility is part of investing. Always has been. Markets aren’t more volatile than they’ve been in the past. What’s different now is how quickly risks can appear and affect investments. Maybe it’s an announcement from the government, a possible pandemic, or simply a tweet.
Part of this is driven by technology, which now allows information to be distributed and consumed faster than ever before. That makes it easier and quicker for news—both good and bad—to make its way into markets. The change is also partly driven by the interconnected global supply chains that tie various economies together.
Whatever the cause, there are two things investors should remember. First and most important: Volatility is typically a short-term phenomenon and retirement is a long-term prospect. Sticking to a long-term investment plan can be one way to counteract the stresses of volatility.
Secondly, markets will eventually learn to adapt to the speed of information. Markets learn to separate noise from true information. That’s something they’ve always done. It will just take some time for markets to learn to work at this new higher speed.
What this can mean for investments
Volatility doesn’t change our commitment to you. Although volatility is typically a short-term phenomenon, we’re not advocating short-term, reactive investment decisions. A practical investment approach is generally based on a long-term view and your time horizon. Here are a few things to keep in mind:
- Volatility may bring opportunity. Markets can overreact—and sell off more than the economic fundamentals would suggest they should. When markets dip for this reason, you can potentially buy more with the money you invest.
- Keep thinking about a broadly diversified portfolio, which may help during volatile periods.