Back in the 4th quarter of 2018, investor fears caused the equity markets to sell off by nearly 20%. It was not any single issue, but rather the confluence of numerous uncertainties – trade tariffs, interest rate concerns, impeachment hearings, and slowing global growth, to name a few. That overreaction set the stage for a strong 2019, as markets recouped those losses and further added gains.
As we fast-forward to today, the markets are experiencing their first fear-induced shocks since the 2018 holiday season. After reaching an all-time market high on February 19, 2020, US markets began experiencing volatility and fell about 6-7% as of February 24, 2020. To blame is the ongoing outbreak of COVID-19 (Coronavirus), which was first identified in Wuhan, China, but has now spread globally.
In the past, similar outbreaks eventually pass but the risk to the markets is if the virus spreads outside of China, shutting down production, slowing economic activity, and ultimately weighing on corporate earnings. Already, over 75 companies that make up the S&P 500 have made statements that they would not meet second-quarter financial targets due to slowed or halted production in China. Within the context of a global economy that is already slowing, there are certainly valid reasons to be concerned, beyond just the human toll that the virus threatens to take.
With that, I view this as more of a short-term pull-back (10-15%) based both upon history and the current economic landscape. Here are a few reasons why:
- Central banks across the globe have shown their commitment to providing liquidity. This makes money both cheap and accessible. The Fed presently plans at least one, if not two, rate cuts in the current calendar year.
- In theory, global growth is supposed to be slowing, but domestically, companies continue to beat earnings. There are 70%+ of companies who have reported their Q4 earnings beat the estimates.
- The IMF is forecasting that Coronavirus will cause a 0.1% decline to global GDP this year. Even if that number increases 5x, it’s still not going to cause a global recession.
- Unemployment rates are at their lowest in 50+ years. When consumers have jobs and are making more money, they spend money.
- The world is watching the spread of the new coronavirus with growing concern. Uncertainty is ever present as we look at the market, the economy, and our resolve to stop the spread. Lost in the discussion about COVID-19 is the fact that the US is experiencing a severe influenza season that has already resulted in more than 16,000 deaths. This JAMA Infographic compares incidence and mortality rates for the 2 diseases:
- History does not provide conclusive proof but traditionally since past performance cannot guarantee future results, but Wall Street’s reaction to the outbreak of such epidemics and fast-moving diseases is often short-lived. The chart below outlines some of these instances:
We know that markets react more intensely to fear and uncertainty than they do on the flip side to positive news.The pull-backs are more like an elevator ride down in their swiftness and severity while the expansions far more resemble a leisurely escalator ride up.
Keep in mind that on average a 5% drawdown in the markets occurs once every 14 weeks. With the recent run in the stock market, valuations have become full (hit 19x P/E) and the market was maybe looking for a reason to take a breather.
In an already drama-filled election year, these recent developments have provided an unexpected additional headwind…but one that certainly can be overcome.
Matthew, Tom, Jamie, and the team at Condon Sullivan Wealth
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For educational purposes only. This is not a recommendation to buy, sell, or hold any product or service. Investing involves risk, including the loss of principal invested.
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