February 26, 2020
Re: Coronavirus and Market Volatility
The last two days have been concerning, as we have seen global equity markets drop more than 6%. This broad-based sell-off is directly related to the coronavirus outbreak that started in China in December. Economic concerns were generally muted until Monday. Yesterday, the sell-off continued after markets digested reports from U.S. health officials cautioning that it is likely the virus could spread throughout the United States. Health officials also outlined courses of action that could be taken if the virus becomes a domestic epidemic.
While we have concerns, we are not yet worried that the virus impact will be the catalyst to push the U.S. into recession. The investment company First Trust looked back at epidemics of the last 40 years and the corresponding stock market performance. Generally speaking, the S&P 500 Index was considerably higher in the subsequent six and twelve-month periods. Looking back to the SARS outbreak, the S&P 500 Index dropped almost 13%. During the Zika outbreak in late 2015 and early 2016, the S&P 500 Index fell by 12.9%. In both cases, the market rebounded double digits over the following six months. CNBC.com published some research that looked back over the last 20 years related to daily market drops of 3% or more. Daily decreases of this magnitude are not rare; in fact, it has happened 71 times.
We expect to see continued pressure and heightened volatility in the near term as markets assess the potential economic impacts. Economies are extremely globally connected today, which contributes to the markets reacting negatively to this news. A significant number of domestic companies who have supply chains in China, the world’s second largest economy, have been impacted. Apple was one of the first companies to warn about how the virus is impacting their supply chain and expected sales. This is an example of how revenue and earning from companies that are highly exposed to China will be affected. Given the uncertainty related to the potential spread of the virus, coupled with the interconnection of global supply chains, the concern is that corporate earnings will be negatively impacted.
Despite these macro-economic concerns, our research indicates that the impact of the virus will not be significant enough to be the catalyst for a recession in the U.S. It is quite possible markets will continue to decline in the near-term. In fact, it would surprise us if we do not see a little more selling; however, U.S. consumer demand remains strong, as does the employment market. We anticipate that the economic impact will be relatively short-lived. While we should consider the health risks, these recent events reinforce our view that we should focus on long-term objectives and not event-based volatility.
We have long held that no one can predict future stock market movements with any reliability. To this point in history, markets have recovered from previous sell-offs to move to new highs. The real question is, how long will the rebound take? One of our responsibilities is to make sure we do not have to sell securities during market drops at unfavorable prices. That is why having a properly aligned portfolio allocation is crucial. It is during these types of market drops that we should be buyers of assets as they are declining in price. Successful investing is having a sound strategy and the fortitude and discipline to implement it. Our successful philosophy is rooted in understanding the purpose of the investment portfolio and knowing when it will be relied upon to meet your needs. Money that you need in the next few years is not invested in the stock market.
Please do not hesitate to contact us if you have any questions or concerns, or if you want to discuss this in more detail.