Coronavirus and the Markets
Earlier this week the S&P 500 and Dow Jones Industrial Average tumbled 4.4% in a single day, registering their largest one-day point drops in history. As of today, the S&P 500 was down 12% from its recent high in just six trading days. The rapid stock market correction was caused by increasing concern that the Coronavirus/COVID-19 will evolve from a more localized epidemic into a global pandemic.
What is a “Pandemic”?
As of this week, the World Health Organization (WHO) had not declared COVID-19 a global pandemic but it is possible that will change. WHO defines a pandemic as the worldwide spread of a new disease. Geographic distribution, disease severity and the impact it has on the whole society is what differentiates a pandemic from an epidemic. WHO Director Tedros Adhanom Ghebreyesus recently said, “For the moment, we are not witnessing the uncontained global spread of this virus, and we are not witnessing large scale severe disease or deaths.”
The most recent pandemic we experienced was the H1N1 swine flu of 2009-2010. According to Centers for Disease Control (CDC), from April 2009 to April 2010, the United States witnessed 60.8 million cases of swine flu with approximately 274,000 people treated in hospital and 12,469 deaths. CDC estimates that between 151,700-575,400 people died worldwide during the first year of the virus.
Since January 20th, there are almost 84,000 confirmed cases of COVID-19 globally with 79,000 of those in mainland China. Tragically, 2,858 deaths have occurred. While these numbers are still quite small relative to the 2009 H1N1 pandemic, it has only been two months since the first cases were reported. Reports of cases outside of China are being reported every few days and 60 cases have been confirmed in the United States.
There is no doubt public health officials are discussing steps to take should the virus begin spreading in their local communities. In 2017, CDC updated their pandemic flu guidelines with lessons learned from the response to H1N1. Many of us have probably forgotten that during this most recent pandemic some schools in hard hit areas were shut down or released early for summer break. My daughters’ high school has already introduced steps they will take with virtual classrooms and home study should COVID-19 arrive.
If you are interested in tracking COVID-19, John’s Hopkins has created a comprehensive tracking tool available at the following link:
What are the stock market implications should a pandemic occur?
Coming into 2020, the economic growth outlook was looking positive after the US-China and US-Mexico-Canada (USMCA) trade deals were signed. Manufacturing indexes were showing signs of improvement globally and U.S. consumption was positive due to historically low unemployment. The spread of Coronavirus has dampened and growth expectations for the coming quarter at minimum.
In the past twenty years, global equity markets have powered through viral outbreaks as the below chart illustrates:
Graph source: originally published Feb. 27, 2020 at https://www.capitalgroup.com/advisor/insights/articles/coronavirus-rattles-markets.html
Will COVID-19 prove different? We do know there will be a near term reduction of company earnings and revenue; markets are in the process of reflecting this reality. There will also be some economic policy response globally to help dampen effects of this shock.
Over the past two years, markets have experienced multiple drops in market value; one close to 20% at the end of 2018, a 9% fall in 2019, along with multiple 4-5% pullbacks. Unfortunately, market volatility is the price of participating in equity markets.
However, attempting to time the market response to fluid events is difficult at best. The benefit of working with a planner is having someone to consult during uncertain times. Over the coming days and weeks, if market events continue to be volatile, reach out to the Johnson Bixby team to confirm your financial plan continues to align with your financial goals and risk tolerance. Historically, the best approach to similar events is investing in a well-diversified portfolio that will reduce volatility and recover with time. The team at Johnson Bixby will continue to monitor events and be available to answer concerns as these events unfold.
There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from difference in generally accepted accounting principles or from economic or political instability in other nations.
Index returns are for illustrative purposes only and do not represent actual investment performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
This material is provided for educational purposes only and is not meant to be investment advice. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.
Written By Lynn Snyder, CFA