COVID-19 vs Market

Have you seen the market lately? It has gone on a wild roller coaster ride. You get to read news like Sensex fell over 1500 points from the peak. Should you be concerned? Do you need to act on this news? Lets find out.

Let me preface by saying that I don’t know anything about the virus, how much affect it will have on economy or how the economy works. Nor can I predict the future and where the markets will go. All I can give is some financial planning advice. Now, how bad is the effect of the virus scare so far on the market? It is actually nothing. Just a blip. The market corrected less than 4%. While it may have been the longest downward correction since a long time, it wasn’t much. Think about the financial crisis of 2008. That was a 50% drop in large cap funds and more than 75% drop in small caps. If this tiny jitter in the market is causing you to worry, then you need to introspect and wonder if you should even be in equity investments in the first place.

The small variations in the market for the past few days is nothing to worry about. It is more of a test of your grit. It is the time to teach your mind to not read too much because this is expected of the stock market. If you expected anything less, you are not ready for the market yet. Having said that, is there anything actionable that you can do given the market situation? Perhaps.

If you haven’t already done anything before the virus hit the market, there is perhaps nothing much to do now. All I can say is check your asset allocation and if it has drifted more than 5% from your target allocation, feel free to course correct keeping taxes in mind. I don’t think this is a big enough correction to worry about re-balancing, but if you have the tax leeway go ahead and do the re-balancing. Alternatively, if you are in the earning and investment phase, invest more of your money into equity going forward. But either way I think the market correction due to the virus is temporary and the market will bounce back within the next few months. It happened before with SARS, MERS, ebola, swine flu, zika etc.

However, as I said before, I cannot predict future. If COVID-19 is somehow more epidemic than the viruses before and has a larger death toll, it might have an impact on economy and the markets will drop further. Even then, all you need to do is re-balance and nothing else. If you are a person like me and understand the risks of market timing, you can try that and change your asset allocation based on market condition. But for the majority of the people, it is not required or disadvantageous to do such things. What we know so far is that the death rate for COVID-19 is just 2.3%, much less than SARS (9.6%) or MERS (34.4%). If you don’t know SARS, MERS and COVID-19 are variants of corona virus. People generally use the term corona virus, but the correct name for the current disease is COVID-19. We also know that COVID-19 is more transmissible than MERS or SARS. So it may impact more people.

Personally, I haven’t done a thing :). Not rebalance, not timing the market, nothing. Just going about my business. The affect of the virus on economy could be on airlines, hotels, insurance providers, manufacturing etc. But that is just the first order effects. What about second order effects? If you have good answers to those, perhaps you can time the market or invest in stocks which might go up (pharma stocks?). As for me, I don’t know anything about the economy and I have nothing to do.

Also understand that central banks world over are trying to “fix” the market situation, so the drop may not be as significant. US FED has already announced they will stimulate economy (and US market went up) and eased the interest rates (US market fell down because the cut was not sufficient perhaps?), then Trump scolds FED for not doing enough and wants more cuts (US futures are up). So markets would like to do what they want, you have to be more stable headed.

Not just US, but central banks from other countries are also easing rates or announcing that they will stimulate the economy. Even our very own RBI announced that it is ready to act. So have not fear :). Although some people like Raghuram Rajan think otherwise and want the governments to fight the virus first and then worry about stimulus later (and I agree).

While people are concerned with issues that are not entirely in our control like the COVID-19 and the affect on economy, I am more concerned about Q3 GDP numbers and if there is some manipulation of Q1 and Q2 GDP number revisions which no one seems to be talking about. What are your thoughts?

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4 thoughts on “COVID-19 vs Market”

  1. Do you have any suggestions on how to safeguard against currency devaluations? We have seen it happening with Turkey, Venezuala and Zimbabwe if i’m not wrong. Even our own rupee declined rapidly within the past decade, I feel its a reality which we need to factor in our investments. I can only think of Gold as the instrument to hedge against such situations. What are your thoughts? I have read somewhere in your blog that you have some investments traded in foreign exchanges as well, Is that your strategy to hedge against currency devaluation? Can you please elaborate.
    By the way, I have read your complete blog. I’m 40 , in IT field, and waiting to exit this rat race/addiction of salary soon ( have been implementing a plan to exit for the past 5 years). My story and thought process and situation is very similar to yours with few exceptions.

    1. Thank you for reading the entire blog! It is very encouraging. Glad to know you are planning to quit the rat race. The salary addiction is very real and many people are unable to come out of it.

      Coming to your questions
      1. Any suggestions to safeguard against currency devaluations?
      A. If you are worried about currency devaluation, I would suggest international exposure to USD which is a stable currency and most currency is valued against it. Gold, is another option (not physical gold but ETF or something). It is a good hedge against devaluations, but the returns may be poor. While rupee is depreciating with respect to dollar, it is inline with the difference of inflation between US and India. In the last 13 years, INR went from 36 to 72. So rate of depreciation is 5.5% or there about. Which is the difference in inflation between India and US. So this should not be a worry.

      2. What about your foreign investments?
      A. I have some stock in the US, but I did not invest in them. I used to work for a company that offers stock in US. So the stock I own is of the company I used to work for. I did leave it as a hedge against INR USD depreciation, but not for the reason that you might think. Only because I am planning some international travel. If I was not planning to travel to US, I would perhaps sell the US stock and invest in India. Another reason I kept the stock is because I believe that stock will grow well so I did not want to sell it. But I never counted that investment in my retirement corpus. My retirement corpus is all India and the US corpus will only be used for international trips.

      Feel free to ask any other questions you might have. Happy to answer.

      1. Thanks for sharing your valuable insights, it helps !
        Currently, my risk appetite accommodates physical gold coins sold by banks (not jewelry) as a part of my investment plan, just as a hedge against currency devaluation, which means I do not expect returns from it and I would be prepared for the liquidity/security issues associated with it.

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