Stock market tailspin fuels 401(k) worries
Stock market indexes had their worst one-day drop since 2011 on Thursday amid widening alarm, as coronavirus cases in Europe and the Middle East grew, and officials in Germany and the United States identified patients with no known connections to others who are infected.
Although financial markets had been fairly resilient to the outbreak for the past month, its expansion in Italy, Iran and South Korea this week ratcheted up the uncertainty around the economic and business implications, and sent 401(k) values downward. The Dow fell another 1,191 points Thursday, off 4.4%. The S&P 500 fell a similar percentage, and the Nasdaq sunk 4.6%
But it's not time to panic, experts say.
"The market is pricing this a worst-case scenario that this tips us into a global recession," said Amanda Agati, chief investment strategist for PNC Financial Services Group. "We're not there yet."
And although the S&P 500 index is now 12% below the all-time high it set just a week ago, putting it officially into correction territory, here's a bit of perspective: At the markets' close Thursday, the S&P 500 matched the all-time highs set in mid-December. And the index is still up 6% from one year ago.
But for those invested in a 401(k), a Roth IRA or a 529 college savings plan who have seen nothing but growth in their accounts over the past few years, the sudden drop is jolting.
"I really think this is going to escalate," John Lattanzi, a 67-year-old General Motors Co. retiree from Middleburg Heights, Ohio, said of the coronavirus outbreak. "I point to if you try to buy those sterile masks, you can't get them. I don't really understand it, and I don't think anybody else does."
For now, Lattanzi has put trust in his broker. He invests in some bank stocks, but hasn't seen much of a personal financial effect yet because he has several different annuities that pay him monthly in addition to his Social Security and three pensions — one from GM, the other from when he was a teacher, and from his late wife.
"I haven’t felt any effects of the financial market at this point," Lattanzi said. "That doesn’t mean it isn’t going to happen."
Agati likened the current market volatility to previous outbreaks: the avian flu in 1997, SARS in 2003, swine flu in 2009, ebola in 2014. The uncertainty made it difficult for investors to forecast, contributing to wild market swings that were more than offset after the crises subsided.
"What we expect is we're in a health-scare scenario where this will evolve, and this, too, will pass," Agati said.
For that reason, experts warned against acting on fear or strong emotional reactions:"Investors should maintain a long-term focus and refrain from making decisions with long-term financial ramifications based on short-term volatility," said Greg McBride, chief financial analyst for Bankrate.com, in a statement.
It had been anticipated the outbreak would create disruptions in the global supply chain. But as the coronavirus spreads, it might begin to affect demand for certain products as quarantines take effect and measures are taken to prevent further expansion. And although nothing of the sort has happened in the United States, Japan said Thursday it was starting spring break earlier, extending it for the full month of March to contain the disease.
"That affects parents and their ability of what they can do, where they go, if they eat out," said David Kudla, CEO of Mainstay Capital Management in Grand Blanc. "Travel, leisure, industrials get affected."
As a result, Kudla for now is staying away from those vulnerable kinds of stocks. Instead, he has turned to safer havens.
Mainstay's portfolios on average have fallen in value less than 1% during the downturn, Kudla said. He recommends hedging stock market investments with gold, which is up 9% year-to-date compared to the market indexes, which are down. Mainstay last week also invested in long-term treasury bonds. On Thursday, 10-year and 30-year treasury yields hit record lows.
"Hedges during a negative episode start zigging as their stocks are zagging," Kudla said. "It diversifies their portfolio and helps to counterbalance what stocks are doing."
The coronavirus episode is an opportunity for investors to assess if they are diversified well or not, he said. Younger people with more time before retirement might want to take advantage of the stock market's lower prices and buy on the dip.
And those looking to build capital should just ride out the swings.
"It’s important for people to take a step back and just look at their portfolios and assess what their personal risk tolerance is," Kudla said.
"If they're not comfortable, then that’s a sign maybe they have too much risk in their portfolio, and if they are, sit tight."