Nearly two months after coronavirus fears sparked a plunge in stock prices, investors fear that the shocks to the world economy will lead to a severe global recession—and wonder what to do about it.
In the past, several viral epidemics initially roiled stock markets, but 12 months after the initial occurrence, the S&P 500 Index was higher than when each outbreak began—10% higher during the Ebola scare (2014)…18%, MERS (2013)…and 21%, SARS (2003).
In the past few years, however, China—where the outbreak and disruption of global supply chains began—has become the world’s second-largest economy and largest trading nation, magnifying the possible effects. Also, the pandemic has devastated the travel industry…resulted in quarantines of millions of people…shut many schools, restaurants, other businesses and sporting and entertainment events…and caused oil prices to plummet. Goldman Sachs forecasts that the US economy will fall into recession in the first half of this year, then may rebound in the second half, depending on how quickly the virus is subdued. Since World War II, seven of the 11 US recessions were accompanied by a bear market—a stock market pullback of at least 20%—such as the one that began in March.
If you are in or near retirement, rebalance your portfolio to allocations that you feel comfortable maintaining. Among stocks to consider selling first are multinational companies that ran way up in price in the 11-year bull market. Make sure you have enough cash to handle at least one to two years of living expenses to ride out a bear market.
If you have 10 or more years until retirement, consider increasing your monthly contributions to take advantage of lower share prices.
For fixed-income investments, to be safe, focus on high-quality bonds because of the risk for corporate defaults in a recession.