Unexpected and Highly Disruptive: The Coronavirus
It’s no secret that equity markets are under pressure. Following a year that saw the S&P 500 Index return 31.5% including dividends, investors’ “animal spirits” are now being tested. As of this writing, the S&P 500 has erased its modest year-to-date gain, currently down close to 8% for the period and into correction territory from its recent high (generally considered to be a decline of greater than 10% but less than 20%). It is termed a correction because historically the drop often “corrects” and returns prices to their longer-term trend.
It’s hard to grasp that in a century spanning the Great Depression and the Financial Crisis, the current correction is the fastest ever. To understand how it happened, you need to recall how euphoric markets very recently were. As recently as two weeks ago, Apple Inc. was capping off a rally that had added $600 billion to its value in eight months. Other tech megacaps pushed valuations in the Nasdaq 100 to a 20-year high. In just three months, Tesla’s market cap shot from $40 billion to $170 billion. Speculators appeared by the droves. Some of those investors now are getting their first real taste of pain. That the cause is a sudden and aggressive coronavirus—Covid 19-- spreading worldwide helps explain why the 11-year-old rally is suddenly at risk. This global health event is both unexpected and highly disruptive.
The COVID-19 outbreak began in earnest in late January 2020. The markets’ reaction to COVID-19 is similar to past outbreak scares, including 2002’s Severe Acute Respiratory Syndrome, or SARS, which also arose in China before spreading elsewhere. The SARS outbreak prompted a near-15% contraction in the S&P 500 until its effects began to subside the following spring.
There are still many unknowns associated with COVID-19, such as the rate and mode of transmission and its impact on the global economy. But, at least as of today, the coronavirus appears to be spreading faster than past pandemics, which could have harsher impacts to citizenry and industries around the world. Many forecasters are now trimming their S&P 500 earnings growth estimates for the year – some more pessimistic forecasts now target 0% cumulative earnings growth as a result of the virus, down significantly from the mid-to-high-single digit growth expectations prior to the outbreak.
That said, markets tend to “bounce back” following the initial period of fear and uncertainty. Importantly, while the coronavirus is the catalyst, the plethora of issues brought to the fore that add to the fluidity of the outlook include interest rate changes, profit growth, the upcoming presidential election, and governmental policy in response to the coronavirus and economic developments.
At Allen Trust Company, we continue to emphasize that clients maintain a long-term investment philosophy and not get sidetracked by short-term events, however negative they may be. This is when long-term asset allocation can make the difference in moving through very disruptive events. A good financial plan, regular reviews of your risk tolerance and rebalancing your portfolio, as well taking your life stage into consideration, are all key components to being prepared financially for varied economic circumstances. Irrational, knee-jerk investment decisions during tough economic times can cause one to miss out on favorable market developments, which could prove detrimental to long-term portfolio performance. All considered, we believe maximizing the value of your financial assets includes holding a diversified portfolio of risk assets and fixed income securities, which is tailored to your financial goals, risk tolerance and time horizon. We are here to answer any questions you may have, and we continue to monitor the economic trajectory of this unfolding global health event.