By Christopher B. Moore, CFP®
The spread of the coronavirus and fears of a large-scale outbreak have pulled the equity market into correction territory, with the S&P 500 selling off 12% from its peak last week. International and emerging markets also sold off, but didn’t benefit from the run up the S&P had earlier in the year and are thus down even more year-to-date.
As fears increased, investors have rotated into safe-haven assets, driving Treasuries to all-time lows, and gold to new highs for the first time since 2013. The response is largely a cascading effect of what seemed like containment of the virus now blowing open with Korea and Italy announcing large infections and lock-down measures. Japan announced plans to keep kids home from school for nearly a month, and the US is starting to take more active measures to plan for, and contain, the spread of the virus. The fear of a global outbreak, where international trade and business is put on hold for an extended period of time, is a significant weight on market sentiment as global growth comes under pressure, notwithstanding the fact that after a 30% rally in markets last year, investors are looking for a reason to take gains.
The rate at which the virus is spreading, and the uncertainty around when those infected are no longer carriers, has many concerned that containment will be hard to manage and take longer than expected. We would note that the number of infected cases, while still growing, resides in between the number of SARS cases (approximately 8,100) from 2003, and the H1N1 virus, known as the swine flu (over 60 million infected in the US) in 2009. Mortality between those two cases ranged between 10% and 0.02%, respectively. The current Coronavirus mortality rate is around 3%. While the ultimate impact to the population and capital markets is unknown at this point, history suggests that these outbreaks are typically contained within a couple quarters and economies normalize thereafter. Travel, industrial, and China dependent businesses will be hardest hit but the overall impact to global GDP growth should be modest, and near-term weakness could be offset by a strong recovery from pent- up demand in latter quarters.
We have been underweight equities since mid-2019 based on the view that the return outlook of owning stocks was not nearly as attractive with continued risks around the US election cycle and trade weighing on a slowing economy. However, with a Phase 1 trade deal signed and behind us, a better-than-expected fourth quarter earnings season, and continued commitment from the Fed to keep rates low (and willingness to go lower), this recent sharp sell-off is leading us to become more constructive on the return potential in equities. Historically, equity markets decline about 10% every 18 months, so this current weakness is not unusual for markets. Clients and investors should be viewing this period as a buying opportunity to rebalance their equity allocations closer to a target-weight. Further material weakness from here may make valuations even more attractive. We think it is important for long-term investors to look beyond temporary bouts of volatility and view these as opportunities for growth rather than reasons to sell. Sticking to your plan should result in maximizing returns while minimizing stress.
Please stay safe and healthy. Contact your client advisor team with any questions or concerns.
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