Putting it mildly, it’s been a tumultuous week. Stock markets worldwide have seen prices fall fast and hard as uncertainties around the spread and economic impact of the novel coronavirus were the catalyst for a large-scale case of “sell first and ask questions later.” As we noted in our communication earlier this week, in times of fear and volatility keeping perspective is important, as is limiting behavioral reaction that can cause permanent portfolio damage. But it can also be hard to do. So, once again we want to focus on facts in considering the situation.
In the markets:
- Risk aversion has been on full display. Over the past five days global stocks fell approximately 10% while bond prices rose. U.S. Treasuries in particular were viewed as a safe haven — the 10-year yield hit record lows below 1.2% and prices rose nearly 2%.
- Certainly, the coronavirus outbreak is a frightening event and the societal impacts are meaningful. But financial markets are imperfect when rapidly discounting the future into current prices, and much of the recent selling appears indiscriminate when considering fundamentals — the proverbial baby is being thrown out with the bathwater. History tells us that staying disciplined with portfolios and allocation targets in times of market turmoil is the right reaction.
- The majority of value in stocks is based on the long-term prospects of future earnings, not the earnings results of the next quarter or two.
- Large swings in stock prices are not uncommon. Since 1980, the average intra-year drop of the S&P 500 has been 13.8%. Interestingly, following a February 19 peak, that is just about the price level now.
- China appears to be stabilizing. New cases are slowing and, haltingly, some normalcy is returning to the economy. Starbucks is reopening stores and Apple factories are getting back to work.
- And while international stock markets were impacted more in the early stages of the outbreak, this week the U.S. market bore the brunt, falling more. In other words, portfolio diversification is still working and beneficial.
- The impact to China’s GDP will be meaningful. One analyst is already calling it a “lost quarter,” but in previous global outbreak scares such as SARS, MERS, and Zika, the bounce back has been rapid. This pattern is likely to repeat itself — in China and other countries.
- The U.S. economy is encountering this headwind from a position of strength, with unemployment at record lows, accommodative interest rates, and trade tensions receding. So, while the ultimate short-term GDP and profit impact will certainly be felt, it is likely to be far less than in many countries, and transitory.
- Central banks are already providing significant monetary and fiscal policy support and indicating that will continue. Fed Chairman, Jerome Powell, noted Friday, “We will use our tools and act as appropriate to support the economy.”
Let us repeat that none of this is to diminish the global nature of this event, nor the human toll. We all likely feel empathy with those suffering and have a natural concern for our loved ones. While we join in thought for all being affected, as fiduciaries, we seek to maintain a prudent approach to managing your financial plans and assets. We will continue to do so and to also keep you apprised. Thank you for the confidence you place in us.