The Future of the Stock Market Amidst the Coronavirus Pandemic
No one can predict the short term future with certainty. Over the long term, I believe the stock market will continue to reach new heights.
The Current State and Concerns
As of March 8, 2020, the global infection numbers are still rising exponentially in many regions. Small numbers of infections in each state now (1 to 100) could increase to thousands or tens of thousands. As this happens, more severe measures to contain the disease will be implemented, which will significantly impact economic output.
The economic damage is yet to be fully realized, and recessions in heavily impacted countries seem inevitable. Small businesses in the U.S., in particular, are at high risk due to the decline in consumer activity, including cessation of events and entertainment.
It's unlikely that the current situation will 'blow over' in a matter of weeks as some might hope. For the market to recover, we need a clear indication of a slowing or leveling off of new infections, successful containment of the disease in affected areas, and the removal of restrictions on imports, exports, travel, etc. Thus, businesses can return to a semblance of normalcy.
The Impact of Human Behavior and Perceptions
While the coronavirus is a severe threat, it is not the most significant danger to society. The panic response by the public and the market is far more damaging. Panic selling in the markets is one of the craziest and most irrational behaviors humans exhibit. People need to realize that the market always recovers, and economic activities will continue. Even if a pathogen turns out to be far more deadly, it is unlikely to be any worse than some historical pandemics.
Part of what makes us the dominant species is our ability to reason. However, in times of crisis, such as war and pandemics, our survival instincts kick in, leading to hasty and often irrational decisions. This behavior shows that human nature has not evolved much in the past quarter of a million years, where fight or flight responses dominate minor threats.
The Market Recovery and Investor Behavior
For the stock market to recover, we need a clear understanding that the world will not end in 2020. Life will eventually return to normal, and in 2040, the panic of 2020 will be a footnote. Whether investors regain confidence in the markets in the next few weeks, or navigate the ensuing rollercoaster of market fluctuations for months, remains uncertain.
In the short term, the stock market recovery seems unlikely. However, in the medium and long term, the market is expected to recover. The fundamental issues underlying economic activities and consumer behavior are not fully controlled by current market fears. As long as humans do not allow panic to dominate our actions, the market will likely bounce back.
Investor panic is not controlling the market. Instead, it is the current economic impact and the loss of workers, medical costs, and business activities as a result of the virus that are driving the drop in the market. Further selling is often a result of the initial panic, not a rational response to the virus's actual impact on the economy.
Investors who manage to time their buying correctly during these periods of fear and panic may find significant opportunities in the long run. The key is to maintain a long-term perspective and avoid being swayed by short-term emotions and market volatility.