VOLATILE MARKETS AND THE ONGOING SPREAD OF THE VIRUS ARE CAUSING ECONOMIC UNCERTAINTY
Beginning last week and continuing into yesterday we saw the worst week on Wall Street since 2008, as the Dow fell into correction due to the outbreak and spread of COVID-19 (and other factors), commonly called novel coronavirus. A market correction is a nerve-wracking event for investors, but the current uneasiness in the markets is no cause for panic.
While the spread of COVID-19 is atypical, market corrections are not. In fact, it’s an entirely normal process, especially after experiencing such strong performance in recent years. There have been 22 market corrections since 1974, and they are aptly named because the market usually “corrects” itself and returns prices to their longer-term trends. While the coronavirus is likely to cause economic impact into at least the second quarter of 2020, historically, including in the recent past, Wall Street’s reaction to these types of epidemics has been short-lived.
The 2002 Severe Acute Respiratory Syndrome (SARS) outbreak, the 2012 Middle Eastern Respiratory Syndrome (MERS) outbreak and the 2014-2016 Ebola Virus Disease (EVD) outbreak did negatively impact economic growth and disrupt the capital markets over short time horizons of one or two years. However, these past virus-triggered market corrections showed that economies and financial markets are not significantly impacted over the long-term. Additionally, all current signs point to the coronavirus outbreak as being less acute than the outbreaks mentioned above.
While it’s important to take coronavirus seriously, especially on the heels of more deaths on U.S. soil, viewing it through the lens of other recent outbreaks is useful in understanding whether its health and financial consequences will be far-reaching. Based upon current statistics, it does not look as though coronavirus will have an unusually high global fatality rate. This is good news on both the health and financial fronts. COVID-19, with a mortality rate of 3 percent globally, has a lower fatality rate than the SARS rate of 10 percent, the MERS rate of 34 percent or the Ebola rate of 38 percent. Coronavirus does appear to be more contagious than other recent viral outbreaks, but it is much less fatal.
It certainly appears that the global response, especially among hot zones for the disease, is being taken more seriously by administrations and citizens alike compared with even one week ago. It is our hope that an improved effort will begin to lower the incidence of active cases over time. If we take that into consideration coupled with a mortality rate that is lower than its modern viral counterparts, it bodes well for the eventual eradication of the virus – as well as financial recovery for investors.
Even after cutting interest rates by .5%, Federal Reserve Chairman Jerome Powell has noted that the Fed is closely monitoring the coronavirus epidemic. The rest of the world’s central banks are doing the same, and it’s possible that a globally coordinated rate cut could head-off further economic impact. Goldman Sachs economists, as well as former Fed official Bill Nelson, have predicted this outcome.
In the U.S., President Trump’s and Congress’s response to the epidemic continues to evolve and is likely to remain fluid as the virus spreads further on American soil. The Centers for Disease Control (CDC) has warned that coronavirus is expected to continue spreading in the U.S. through community transmission. While there is no way to know for certain when the COVID-19 virus will peak, some comfort can be found in the fact that the cases in the US are starkly lower than in other hot zones of the world and the President and Congress seem poised to offer some type of relief for businesses and families suffering the greatest impact from the virus. The President could choose to make targeted tax cuts or take other emergency measures to prevent further economic damage, and those moves are currently being debated.
Even with the spread of COVID-19, the U.S. economy is likely to show higher than 2 percent growth for the first quarter of 2020. Most of the economic impact from coronavirus will be felt in the second quarter, where it’s possible we will see losses of about 0.25 percent. However, current statistics do not seem to indicate that this market correction will lead to a recession. In the cases of SARS, MERS and EVD, there was no significant, lasting damage to the global economy.
It is impossible to know – or even to guess – the full scale and ultimate impact of coronavirus. No one can definitively say when coronavirus will burn itself out and discontinue spreading, we just know it eventually will. It’s also impossible to know how long the current market volatility will last, as well as when the current market correction will end. During a viral epidemic, some market loss is inevitable due to prevention and quarantine efforts that cause economic slowdown, though panic-selling has also contributed to the significant U.S. market losses last week and yesterday.
For now, there are some positive indicators. News that world leaders are in talks about a coordinated economic response is helping to stabilize the markets. We are seeing the Dow climb in early trading today, and Asian and European markets are rebounding as well.
Much can change day to day in an epidemic scenario, and there are no guarantees, but the markets appear to be trying to find a floor from which a rebound can take place rather than moving into recession.
History has shown that attempts to time the market or bet on the future with speculative information tends to be a losing strategy. In the current market scenario, a quick rebound is possible, in which case widespread panic among investors will be short-lived. Dropping into a bear market is also possible (to which we got very close) and that could produce excellent buying opportunities. Policymakers seem poised to take measures to ensure financial stability, though we can’t predict their overall impact. In short, much remains unclear and the market remains volatile.
Still, steadfast investors who understand that this correction is no reason to abandon a still strong market in the aftermath of a 30 percent growth year stand to benefit from stocks that are cheaper to buy now and dividends that are higher as a percentage of share price. Though coronavirus continues to spread and uncertainty about its containment is impacting investors, optimism about getting a handle on the virus and a coordinated global response bode well for regaining market stability.