It’s been a difficult week for the stock market with the global equity selloff as a result of the uncertainty surrounding the coronavirus and questions about how its impact economic activity, corporate earnings, supply chains, and global growth. We are recommending to our clients to stay the course with their long-term asset allocation policy and not be reactive to market volatility. We are monitoring the capital market environment closely but have not made any changes to client portfolios based on volatility around coronavirus.
After Chinese officials first alerted the World Health Organization (WHO) of an outbreak of coronavirus (or COVID-19) on December 31, 2019, the number of infections grew, deaths followed, and markets did not react negatively. Only in the past week, when cases appeared outside China, have markets reacted swiftly, with global equities falling significantly each day this week, into correction territory of greater than a 10 percent decline. While at the same time, government bond yields around the world plummeted. For example, the U.S. 10-year Treasury Bond closed Friday at 1.13 percent, an all-time low.
The impact on China has been substantial as the number of confirmed cases continues to rise, as does the number of recovery cases, and economic activity in China has ground to a halt. Passenger traffic (airports and train stations) is a fraction of normal activity.
At the moment, the economic disruption from COVID-19 is likely to shave around 1% off of the U.S. GDP this quarter, but assuming peak cases occur soon, the impact on economic output for the year should be negligible. The labor market is tight, incomes are rising, and monetary policy is accommodative. It would take a much more prolonged economic disruption to send the U.S. economy into recession. Absent a recession, markets will tremble, but not crash.
Following this week’s sharp pullback, the S&P 500’s price/earnings (PE) ratio is down from over 18X last week to 16.7X, which is in line with the 25-year average PE ratio. It’s likely that stocks will continue to sell off until we know the true impact this virus will have on economic growth. However, history has shown that it’s nearly impossible to trade around, or time the market bottom, of these types of events.
When the SARS scare hit in 2003 and Zika virus spiked in 2015-16, stock markets fell nearly 13 percent each time and quickly recovered. We don’t know how COVID-19 will play out, but expect it to affect business and economic activity in the near term. Longer term conditions should normalize. It’s quite typical for the stock market to have a 10 percent or more correction. On average over the last 40 years, the S&P 500 Index averaged a 14 percent drop intra-year and yet still posted positive annual returns in 30 of the last 40 years (75 percent of the time).
Performance for fixed income so far this year has been up more than 3 percent (Bloomberg Barclays Aggregate Index) as interest rates hit record lows. The global equity market (MSCI-ACWI index) has been down around 8 percent year-to-date. We recommend that you stay the course with the long-term asset allocation policy and not be reactive to market volatility.
This communication was prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. Past performance is not indicative of future results. Resources include: Angeles and JP Morgan commentary and data.
ViaGem, LLC 