Hi There.

I’d like pause your regularly scheduled entertainment to talk about how the stock market works. More specifically, I’d like to talk about how the Coronavirus is impacting the stock market. Worse, I’m even going to give you advice on what to do about it.

TLDR: Don’t touch your stocks, and for the love of God don’t sell anything.

Last week, all of the news on media source was talking about how stocks were tanking, the Dow lost over 3,000 points (whatever that means), I saw words about the worst losses since the recession. It wasn’t just the US, markets around the world suffered. You don’t have to be a Finance expert to know that it was scary. Today, there was the beginning of a correction, and I can hardly find the numbers for last week’s bad news. 

Amid all the panic and fear-mongering, let’s take a step back. Why are fears around the coronavirus teetering-tottering the stock market? It can all be traced to rule one of the stock market: Investors are rational. I have some thoughts on whether or not that theory pans out, but the one thing “investors”, ie people, are, is predictable. And the one thing the investing community values most is predictability. 

The value of the stock market at any set point at time is intended to measure the value of every company in the market, based on both past performance and predictions of future earnings. The calculations of future earnings are dependent on all available data about a company, and there’s an adjustment everytime new information comes out. This information can come in the form of an earnings report, changes in management, or changes in the federal regulations, for example. Changes in a stock price are typically due to changes in predictable outcomes. 

Right now, the coronavirus is not predictable. Companies know that their future earnings will be affected, but not by how much. This uncertainty is what’s causing the market to spiral out of control. All of the banks are adjusting their models, driving down stock prices. Then, the news articles and media outlets convey a message of panic, fear. Normal people, day to day investors, start to pull out and sell stocks. The market drops even lower. 

Let me tell you a secret. The market always recovers. Always. There’s yet to be a recession we haven’t recovered from. So today, the Bank of England said it would help stabilize markets. That statement alone was enough to begin to stabilize the market, because it added a predictable outcome to the chaos. It gave investors hope that other central banks will do the same. Markets rose. Update: The US Fed has followed suit, dropping interest rates.

It will probably go down again, especially if the virus continues to spread. Eventually some new scary thing will come along, likely in the form of a Presidential election. As much as I abhor offering financial advice, the one thing I will say is that the single biggest mistake you can do as an investor is to sell off during a panic. You haven’t lost anything until you sell the stock. Just hang on, it will go back up. No one knows how long it will take without a crystal ball, but in the long run, the stock market will be okay. 

If you want to go buy and sell stocks right now, you go ahead. But understand that sometimes, investing is just a fancy word for gambling.

End Rant.

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