As the media cycle continues to be dominated with headlines regarding the coronavirus (COVID-19), we wanted to provide an update on how equity markets are reacting. We will continue to monitor events and data related to the coronavirus and reach out as appropriate.
As news is released daily on COVID-19, it is easy to come across speculation and unverified information. Two authoritative sources of data are the World Health Organization (WHO) and Centers for Disease Control (CDC). The link below is a press release detailing the WHO Director General’s comments from March 3 and provides details on what is known about COVID-19 to date.
“To summarize, COVID-19 spreads less efficiently than flu, transmission does not appear to be driven by people who are not sick, it causes more severe illness than flu, there are not yet any vaccines or therapeutics, and it can be contained – which is why we must do everything we can to contain it. That’s why WHO recommends a comprehensive approach.”
–WHO Director General Dr. Tedros Adhanom Ghebreyesus
The economic impact of COVID-19 remains unclear, but most economists see a slowdown in growth for the current quarter. The extent and duration of the slowdown will depend on the severity and length of the epidemic and how well global governments respond to the health crisis.
On February 22, the International Monetary Fund (IMF) lowered their global GDP estimate by 0.1% due to the impact of COVID-19. However, now that the epidemic has spread beyond China, the IMF reduced their global growth estimate further to 0.5% on Wednesday, March 4. Their expectation for global GDP is now 2.7% which is modestly below 2019’s growth rate.
As COVID-19 spread beyond China, equity markets around the world responded quickly and aggressively. Below is a chart of global stock market returns through the end of February. One point of interest is that the two of the countries hardest hit by the virus—China and Italy—are two of the “best” performing equity markets year to date.
What is the policy response, and will it work?
On Tuesday, the Federal Reserve surprised most market participants with an emergency Federal Funds rate cut of 0.5%. The Fed said, “Fundamentals of the U.S. economy remain strong, but the coronavirus poses evolving risks to economic activity.”
In addition to the Federal Reserve’s recent action, other governments have taken steps to prevent a longer-term economic slowdown. Hong Kong announced stimulus equivalent to 4% of GDP in the form of 10,000 Hong Kong dollars given to all residents 18 or older. Germany announced plans to allow higher deficit spending. China introduced measures from cutting interest rates to reducing payroll taxes and many market participants expect other central banks to cut interest rates in the coming days and weeks.
No one knows if equity markets have further to drop from here or if the above measures will stabilize the recent selloff. Markets continue to be volatile this week with large daily fluctuations both up and down. Prior to the recent selloff U.S. equities were trading above their historical averages and were more expensive than their international peers. However, with the recent selloff U.S. equities have rapidly returned closer to their long-term valuations. The below chart from the Leuthold Group shows prior to the market selloff S&P 500 companies had an average Price to Earnings (P/E) ratio over 19x. Now the average P/E ratio is closer to the long-term average of 16.6x:
What can investors do?
COVID-19 and how it is progressing will be headline news for the coming weeks, if not months. While researchers have started to recruit healthy Seattle-area volunteers to participate in the first clinical trial of an experimental coronavirus vaccine, federal health officials have cautioned that real-world use of the shots—if they succeed in testing—remains more than a year away.
As stated in a prior post, trying to time this volatile market is difficult at best. The fact that China and Italy have outperformed most markets despite having the most severe outbreaks is a good example of markets not reacting as one might expect. It is also a good example that having a diversified portfolio can help decrease volatility over time.
So, what should investors do in response to COVID-19?
- With interest rates now at historic lows, investors should be reviewing any outstanding longer-term debt obligations. The opportunity to refinance at lower rates should not be overlooked.
- Volatile market events are also opportunities to put more money to work at lower prices. If you have money that you can invest for five years or more, there may be near term opportunities to invest at lower valuations.
We know recent market events can cause undue concern. The team at Johnson Bixby will continue monitoring market events and data related to coronavirus and reach out as appropriate. Our focus will continue to be on providing a well-diversified portfolio designed for your specific needs and reaching your short and long-term financial goals.
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.