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SHOULD A GLOBAL HEALTH  SCARE CHANGE YOUR  INVESTMENT STRATEGY?

In the space of little more than a week, equity markets saw all time highs erased by a series of uncommonly swift plunges, as investors, attempt to price the expanding each of the novel coronavirus, or COVID-19.

What started as a localized outbreak in central China has quickly spread to other parts of the globe, bringing with it as much anxiety as actual suffering.

In the short term, market patterns are best explained by the tilt of collective investor emotion, with stocks getting ahead of themselves in periods of excess elation and becoming attractive when fear is the dominant sentiment (hence the oft-referenced Buffett quote "be fearful when others are greedy and greedy when others are fearful"). While taking advantage of overreactions in the here and now has historically been a great way to set the table for long run success, it can be hard to steel one's nerve when most others are losing theirs. With that in mind, below are some thoughts that might help individuals look past the current tumult and remain focused on their ultimate investing goals:

When might the market begin to look beyond COVID-19? Using past viral outbreaks as a guide, stocks have tended to recover before the number of observed cases has begun to decline. In fact, the market has typically signaled' all clear when infections are still climbing, but are doing so at a decreasing rate.

Technology is helping - whereas it took three months to get a treatment to trial stage during the SARS crisis, advances in drug development technology and accumulated knowledge from past experience have allowed researchers to already reach this milepost for COVID-19.

How significant is the market pullback? Though one imagines a placid trajectory when told that the S&P 500 generated an annualized return of more than 10% in the 40 years spanning 1979-2019, the reality is that stocks experienced an average yearly drop of more than 14% from their previous peak during that period. As of the end of February, we haven't yet matched that fairly standard decline.

Should I exit the market and reinvest when things are more certain? In the cases of SARS, Bird Flu, Swine Flu, MERS, Ebola, and Zika, the S&P 500 was up by more than 20% on average in the 12 months following the start of each epidemic, with none having resulted in a negative one-year return. As mentioned above, the ideal moment to re-renter stocks in most of these cases occurred long before we felt comfortable that the afflictions were well under control, making any attempt at timing extremely difficult. This challenge would be compounded in a non-registered account, where the tactical advantage would have to be great enough to not only generate a meaningful return, but to also overcome the presumed tax impact of crystallizing unrealized gains.

Diversification has worked - to the market close on February 27, the DM Balanced Composite was down just 1.9% year-to-date. Part of this resiliency is owed to the relative outperformance of our equity positions during the market decline and part is due to the corresponding rush to safety, which has pushed bond prices up and interest yields down. The fall in rates also has implications for the relative attractiveness of stocks. When the dust settles, it's likely that the positive spread between dividend and interest yields will have stretched significantly and the valuation of equities compared to the cost of money will be sitting at rarely seen levels.

While we can't project what the coming weeks will bring for stocks or how the next chapter of the novel coronavirus episode will unfold, we are confident that the current setback will eventually be marked as an interruption in the market's path, rather than a point of directional change. As for the question raised in the title of this piece, the follow up query should be "Do I believe that current events will have a meaningful impact on economic performance, corporate earnings, or the financial system in five years time?" If the answer is 'no'; and you invested with an equity time horizon in mind, then stay the course.

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