The Week in Review: March 2, 2020
Fear Gets Ahead of the Virus
Investors took a sanguine stance when the coronavirus was contained to China. Last weekend (Feb. 22/23), headlines surfaced the virus had spread to Italy, South Korea, and Iran, and sentiment quickly changed. Although some of the veracity of the numbers are being questioned, new cases in China appear to be slowing.
Why the steep selloff last week? There are rising fears that the spread of the coronavirus may disrupt the global and U.S. economy more than had been expected a few weeks ago.
If it occurs, a significant economic slowdown will delay the anticipated acceleration in 2020 corporate profit growth. Hence, short-term traders and computer-based programs have reacted by hitting the sell button.
So far, the impact from the virus has been contained to financial markets. Selling has been indiscriminate, and irrational in my view.
Perspective and correction
It’s difficult to model the economic impact of a global epidemic. For the most part, markets were unaffected by past outbreaks.
Today, investors have decided there are few modern landmarks to follow; therefore, we have seen a “throw the baby out with the bathwater” mentality.
Is a bottom within sight? Did we hit a bottom on Friday? Could we get good news on the virus or a coordinated reaction from global central banks? No one can predict short-term movements in the market. As we know, volatility is inevitable, and it has typically been short-lived.
Since the decline began, the S&P 500 Index has fallen more than 10%, which makes this pullback an official correction. It’s the 7th correction of the 10-year bull market. There have been 24 such corrections since 1974. Four turned into bear markets (20% or greater decline) (Source: Charles Schwab).
Most corrections do not turn into bear markets. When they have, they were associated with a recession, with the exception of 1987.
The graphic below is more encouraging. Total active worldwide cases = Total Cases minus Recoveries minus Deaths. They have been in a downward trend.
While we don’t know if this will eventually turn into a significant health crisis, we’ve lived with polio, SARS, MERS, H1N1, and the flu, which strikes every year and tragically takes lives. There have been 18,000 – 46,000 deaths tied to the flu between Oct 1, 2019 – Feb 22, 2020 per the Centers for Disease Control and Prevention. Yet, we haven’t been subjected to wall-to-wall media coverage.
I’m not a medical professional but we should all take reasonable precautions. These include, washing your hands, keeping hands your away from your face, and using the sanitized towels for the grocery cart. Simple safeguards will reduce the risk of contracting any number of viruses, including the cold or flu.
Additionally, if you plan to travel, enjoy your trip but consider travel insurance.
From an economic perspective, the U.S. economy remains on solid ground. Falling mortgage rates are supporting housing, consumer confidence is high, and the labor market is strong. Further, the banking system is in much better shape than it was when we entered the 2008 crisis.
While declines can be unnerving, the individually crafted financial plan we recommend for your specific situation is based on several factors, including your risk preferences and time horizon. It is a roadmap to your financial goals. It incorporates inevitable market setbacks and helps prevent one from making rash decisions when markets turn volatile. Or, for that matter, when stocks surge ahead, and one may be tempted to take a more aggressive but riskier stance.
A move to cash can provide short-term comfort, but historically, the trade-off has compromised longer-term returns, placing one’s long-term financial goals at risk.
If you have any questions or concerns, feel free to reach out to me, Will, or Tyler. That’s what we are here for.
Two for the Road
[T]he irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” — Daniel Crosby
“I’m assuming there will be no apocalypse. And that’s almost always, if not quite always, a good assumption.” — John C. Bogle, Founder of Vangaurd
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