Coronavirus and the Economy
Updated: Aug 4, 2020
As you are aware, last week the markets entered into correction territory with the S&P 500 dropping 11.5%. No one enjoys seeing their accounts decrease in value, but what made it even more painful was the speed at which that drop occurred– only five days. For comparison’s sake, the last correction back in December of 2018 (-19.8%) took well over two months.
Here is a summary of the information below:
The threat of the coronavirus jumping to the United States and an overvalued stock market let to a strong selloff last week.
Stock market corrections (drops of 10% or more) are normal and healthy. They occur every every 12 – 18 months on average with the last happening 15 months ago.
This should be a short-term problem and for long-term investors could provide a good buying opportunity.
The news and uncertainty surrounding the coronavirus is one of the main drivers of this drop. The situation is very fluid and still developing as we are all searching for more answers. The CDC and WHO have not helped dispel this uncertainty as they have not provided much concrete information. However, what we do know is that many companies have said it will cause a short-term disruption or slowdown. Another reason from the decline, that hasn’t received much attention, is how the markets were overvalued at the end of 2019. For some investors, the coronavirus is the trigger to sell and reap their gains or even sell stocks short (an attempt to make money when markets decline). Combined, both of these only further increased the steep pullback of the market last week.
While its counterintuitive, market corrections are healthy and necessary for a continuation of a bull market. As a reminder, a bull market starts after a 20% increase in the stock market and only ends after a 20% drop. Corrections occur on average every 12 – 18 months, and we are about 15 months past the last correction in 2018. Since the start of the bull market in 2009, we have seen seven corrections, all resulting in the markets continuing to eventually move higher. The length of the correction is on average four to six months. If you were to use the previous corrections as buying opportunities, you would have bolstered already stellar annual market returns.
News organizations and media outlets sometimes have a way of overhyping stories or creating more fear/panic than necessary. This may also prove to be the case with the coronavirus. As the WHO (World Health Organization) has said, individuals who contract the virus may just experience only mild flu-like symptoms. The Wall Street Journal has said it is nearly impossible to distinguish coronavirus from the common flu, and Yardeni Research argues that the common flu kills more individuals each year than the coronavirus has so far. The CDC (Center for Diseases Control and Prevention) is unsure if warm weather will dissipate the spread of the virus as it does with the common cold and flu but acknowledges it may. I do not mean to underscore the severity or human toll the coronavirus may take, simply assert that the coronavirus might not be as catastrophic to the global economy as some predict.
Making accurate future predictions is nearly impossible but general assertions or expectations can be made with more accuracy. I will try to provide general high-level expectations. Bank of America has revised their GDP growth rate in the US from 3.1% to 2.8%. That is a relatively small cut and one the markets should have already priced in. Interestingly, the bond market does not reflect the same amount of panic and fear as stock investors. That, along with the strength in consumer spending/balance sheets and a strong possibility of the federal reserve cutting interest rates, all point to this not turning into a full-blown recession. This may even turn into a fairly decent buying opportunity over the next few months.
It is important to remember that corrections do not last forever. When markets do correct, it is usually just best to wait. As history shows, there’s a good chance of recovering correction-related losses relatively quickly. The SARS epidemic and MERS epidemic came and went all while the stock market continued to march higher over time driven by fundamental economic factors, which are all still strong today. Many economists expect the expansion and bull market to continue with a potentially sharp rebound once disruptions dissipate. Being a long-term investor means we focus on the long-term! That means looking past any single week, month, quarter or even year. Stocks are very volatile in the short-term, but over the long-term, returns are positive far more times than negative. No one likes to see the value of their account decrease, but we know that ups and downs are a normal part of the investment cycle. We just need to get through the down days to make sure we experience the ups.
Please feel free to email or call me with any other concerns or questions,
Evan Werckenthien, CFP
Sources:
National Bureau of economic research (12/31/2019)
Wall Street Journnal
Standard & Poor’s. data through February 28, 2020.
Disclosure:
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