Coronavirus (COVID-19) Outbreak
We don’t know how serious and widespread this coronavirus (COVID-19) outbreak will ultimately be, but markets are clearly selling off on expectations of slowing economic growth or outright contraction/recession. U.S. stocks have dropped almost 20 percent from their all-time highs reached merely three weeks ago. Some of the most impacted industries have seen companies’ stock prices decline 50 percent or more. Adding to the plunge is the more than 17 percent decline of oil prices resulting from a price war between Saudi Arabia and Russia on top of the virus-related decline in demand.
You have heard about curtailed travel, cancelled or postponed events, quarantines, and attempts to disinfect. As more of these measures are put in place, global economic activity will certainly contract further.
The fact that equity markets entered the COVID-19 scare at or near all-time highs and at full valuations exacerbated the stock market declines. Given the high valuations, it is no surprise that a global health scare and the large decline in oil prices would cause extreme stock price swings. And with the growth of high speed, algorithmic trading, huge price moves based on news headlines can happen almost instantly.
Over the last 40 years, there have been numerous pandemic scares (Chart #1).
And while they have occurred at various stages of economic growth and equity valuation levels, the market impact has been more-or-less temporary. There have also been plenty of days during that time that saw large stock price declines (Chart #2).
Monday March 9th –interestingly, the 11th anniversary of the Great Financial Crisis market bottom– was the eighth worst day (on a percentage basis) since 1987. Within a year of 13 of the prior 15 worst days, the S&P 500 was up 17 percent or more. Of course, past performance is no guarantee, but it is reasonable to expect that efforts to contain the spread of COVID-19 will eventually succeed, and that its impact on global economic activity will fade, similar to MERS, SARS, Ebola, and Zika.
Our most important job as investment professionals is to help our clients prepare for these inevitable periods of stock market declines. For the last 18 months, we have written about the importance of rebalancing portfolios. The long post-crisis bull market has given us the opportunity to do so. It is critical to routinely assess whether your portfolios are appropriately balanced among asset classes, based on your specific goals, risk tolerance, and liquidity needs.
Sudden market drops like those we’ve seen the last few weeks are scary. It is human nature to be frightened and emotional when so much uncertainty exists. We feel the pain too. Yet these are the times when your Glenview investment professionals can add the most value by helping you stick with your plans for achieving your goals and objectives, and successfully weathering these inevitable stock market shocks.
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