Market Update: The Impact of Coronavirus

By David K. Little, CFP®, CFA and David K. MacLeod, CFP®, CFA

As you already know, stock markets around the world have continued to decline. Sentiment has reversed dramatically. Just last week, U.S. stock market indexes hit an all-time high even as the total global coronavirus cases went over 75,000. As we’ve said before, we don’t think anyone can consistently predict short-term market swings or understand precisely why they occur. 

Investors are right to be concerned about the economic effects of the coronavirus spread. We expect economic growth to slow due to the supply chain disruptions from factory shutdowns, reduced global travel spending, and general caution among consumers. Vanguard expects China’s gross domestic product (GDP) to be 0.5 percentage point lower due to the virus in 2020. There is greater uncertainty in forecasting economic growth rates and corporate profits.

Contrary to what we’d expect, stock declines accelerated even as the growth rate of new coronavirus cases slowed. But it is consistent with what we know about the stock market—short-term patterns are unpredictable. People get emotional during stock market drops and feel like selling at any price just to make the pain stop, driving prices lower and lower.

In times like these, we remember that every past stock market drop has ended and been followed by an even greater upswing to new highs. Below is a JP Morgan chart we’ve shared in the past which shows, in red, intra-year U.S. stock market declines going back to 1980. The current decline of 12% from last week’s all-time high is very close to the average intra-year decline of 13.8%. In spite of the intra-year declines, stocks have gone up in 75% of calendar years since 1980.

It’s worth highlighting that bonds and alternatives have held up well as stocks have dropped. Bonds are broadly up about 1% year-to-date, while alternatives have lost much less than stocks. The past week is a stark reminder of the importance of diversification. As we review client portfolios, a continued stock market drop would cause us to look to rebalance and buy more stocks at low prices.

Feel free to give us a call if you want to talk.