Coronavirus Impacts Stock Markets Around the World

What happened.

Stock markets around the world fell in January, hurt by news of the spread of the coronavirus. Emerging markets were hit most, closing the month down 4.66 percent (MSCI Emerging Markets Index). It’s worth noting that emerging markets are the riskiest type of stocks, and typically have a small weight in our portfolios. International developed markets were down 2.09 percent, less than half the amount of emerging markets (MSCI EAFE Index). At home, large-cap stocks were down only very slightly, falling 0.04 percent (S&P 500). Small caps, however, fell 3.97 percent (S&P 600). Bonds were a happy spot in the markets, rising as interest rates fell. The Bloomberg Barclays Aggregate Bond Index was up by 1.92 percent. The month was somewhat volatile for U.S. stocks. The S&P 500 moved by more than +/- 1 percent on three days.

Why it happened.

The outbreak of the coronavirus is first and foremost a human tragedy.  As news arrived of its spread across China and neighboring countries, and to other countries around the world, stock markets fell.  Stocks fell first in emerging markets (China is the largest market in the MSCI Emerging Markets Index) but spread to other markets as investors digested the news that the virus might spread beyond the region.  The coronavirus is an unhappy example of how what’s not expected affects markets.  The outbreak of tensions with Iran was another case of unexpected news shaking markets.  At the start of the month, tensions escalated, and stocks fell, but recovered as both sides appeared to back off from a full confrontation.  In contrast, Brexit day on Jan. 31, marking the end of the first phase of the Brexit process, was known in advance and didn’t affect markets.

Regardless of these global events, news about the U.S. economy continued to be largely positive.  Companies started to report earnings for the last quarter of 2019 late in the month.  Once again, most companies have beaten expectations.

What this means for you.

Given the drop in stock prices, your account value would probably have declined in January. Stocks represent a higher level of risk, and the more risk you’re willing to accept, the greater the decline would have been.

At the same time, the portion of your portfolio invested in bonds would have partly offset the fall in stocks. This is a good example of one of the benefits of diversification. As we discuss in this month’s sidebar, you can’t control the ups and downs of the markets. But there are things you can control.

At Financial Engines, we build portfolios that reflect your individual situation and preferences.  Please contact us if you’d like to understand the amount of risk you’re taking, or to make any adjustments.

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