Over the past several weeks, the coronavirus outbreak has been steadily spreading around the world. This virus is causing big changes in American households including their financial lives.
The Market Correction
Due to global concern around the coronavirus, the American market underwent a correction on Thursday, February 27, 2020. A correction is defined as a drop of 10% or more in one of the major U.S. stock indexes. Historically, corrections happen periodically (there have been 26 since World War II) with an average decline of 13.7%. Corrections, on average, take approximately 4 months to recover from.
Although past performance is not indicative of future performance or patterns, the chart below shows a similar pattern of market drops and rebounds from virus outbreaks such as SARs and Zika. Investors who held on to their investments during these market swings avoided permanent losses. In simple terms, the investors did nothing to their portfolio and their portfolios recovered within a few months. We’ve already seen some bounce-back from this particular market correction sparked by the coronavirus.
Source: Vanguard calculations, based on data from FactSet.
Notes: U.S. stocks are represented by the S&P 500 Index. U.S. bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009; Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.
The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.
Decreasing Interest Rates
As international fear about the coronavirus continues, the Federal Reserve has responded by cutting its benchmark interest rate. It’s not unprecedented, but it’s rare that the Federal Reserve cuts their federal fund rates. This past week, they cut their federal funds rate by a half-point (now 1-1.25%). It was noted that the rate cut was due to the potential risk that coronavirus might have for the American economy.
What does this mean for you?
Some rates, like on new mortgages, could drop. If you’re currently considering buying a home, it may be time to lock in a pre-approval rate. If you own your home, you might want to look at refinancing to lock in a lower rate and save money over the lifetime of your mortgage.
Although the media tends to sensationalize everything about the coronavirus and its impact on the markets, it’s important to hit “pause” before making big decisions about your financial plan. Decisions like these should not be made alone. At 2050 Wealth Partners, we guide our clients through all cycles of life. Learn more about how we can partner with you on your financial journey by visiting our Partner with Us Page.