Market Volatility and the Impact of the Coronavirus
The coronavirus epidemic, which began in January, has continued to exact a significant human and financial toll. As of the beginning of March, there have been nearly 90,000 confirmed cases of persons infected with the virus and more than 3,000 deaths, surpassing the death toll from the SARS (Severe Acute Respiratory Syndrome) virus in 2003. The World Health Organization has declared the coronavirus a global health emergency. Most of the cases initially occurred in the Chinese province of Hubei, which was quarantined. The virus has since spread to over 30 countries, including South Korea, Japan, Europe, and the Middle East, and is expected to eventually spread in the United States. Vaccines are being tested, but are not expected to be available to the public for many months.
How have the financial markets reacted? The US stock market, after an initial rally, has corrected at the fastest pace on record. After reaching a high of 3,386 on February 19th, the S&P 500 Index dropped to 2,954 at the end of February, a 12.8% correction.
Looking back in time, markets generally shrugged off viruses so long as they were perceived as being under control. The SARS virus, after driving an initial selloff in 2003, was largely contained and the S&P 500 index rose nearly 30% for the year.
Are things different this time? The answer so far, has been yes.
Why have the financial markets reacted so suddenly to the coronavirus epidemic?
- The virus has not been contained, and there is significant uncertainty as to how long the virus will last and its impact on global economies. This is causing current market analysis, data and forecasts to be difficult, if not impossible, to rely on. There is a saying that “markets dislike uncertainty”, which is helping drive stocks downward, with investors moving into “safe haven” assets such as US government bonds, gold and cash.
- The Chinese economy is expected to slow significantly due to the virus, which will negatively impact trade with other countries and world economic growth.
- US companies such as Apple and Starbucks have temporarily closed stores in China and flights have been suspended. Since Apple also builds its iPhones in China, any slowdown in production and demand could negatively impact its earnings going forward. In fact, Apple has warned that it will miss its sales forecast in the first quarter of this year. Since Apple has a major impact on the overall US stock market, this bears watching in addition to other companies’ supply chain disruptions.
- US Gross Domestic Product (GDP), while steady, has been slowing over time and is now averaging around 2% on an annualized basis. The key driver to GDP growth has been consumer spending. However, spending slowed in the fourth quarter of 2019 and any further slowdown due to the virus could hurt economic growth, and stock prices. Recent estimates forecast a 0.25% to 0.5% reduction in 2020 US GDP growth, and global GDP growth could be lowered by 0.5% or more.
US stock prices had recently been at record highs and have been buoyed by expectations that the Federal Reserve will continue to lower interest rates. However, the coronavirus has tested the resilience of the stock market and has led to the Federal Reserve cutting rates by 50 basis points on an emergency basis on March 3rd.
Based on past influenzas, the coronavirus cycle will naturally play out, and hopefully, conditions will improve with the warmer weather,
For an investor, maintaining clear objectives and a well-defined investing time horizon can make it easier to remain calm when investment values are falling. Portfolio diversification can also provide protection from market volatility. Although the stock market has historically recovered its losses over time, market timing, in terms of calling a bottom or “buying the dips”, is difficult, if not impossible, in this uncertain and volatile environment.
NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future investment results.
About the Author