The Coronavirus and the US Financial Markets

By Sterling E. Russell, CFA
Director of Fixed Income

Last week in a note to our advisors, I wrote that I felt the markets were on an unstainable trajectory and had been for several months.  When I wrote those words, I didn’t expect things would change so quickly.  While most pundits are blaming the Coronavirus for the market decline, I believe the seeds of the current correction were sown in the last several months of trading. For the past few months, the markets continued to march higher even as earnings and revenue growth were slowing.  In my view, the best evidence that a correction was looming was the fact that the rally became more and more narrow with a limited number of stocks like TESLA and Amazon generating over 90% of the gains while many solid household names were languishing or even falling. 

The more relevant question for investors is how long will this “correction” last and how deep will it be?  I believe a 10% correction in the S&P 500 is a reasonable expectation given the run-up over the past few months. Having said that, the Coronavirus is a wildcard that could push prices lower if it continues to spread.  At this point in time, it is largely a headline risk – even in China, it is impacting only a tiny fraction of the population. Where it could have a real impact on the US is in the supply chain which will show up in lower industrial production.  Other sectors that are being impacted are leisure including air travel, cruise lines, and events where large crowds gather.

The U.S. economy remains on solid footing, and we have one of, if not the best health care systems in the world and the ability to deal with these types of diseases – already there are vaccines being tested for the virus. Should one of those drugs prove viable I expect the markets will rebound quickly – too quickly for investors who panicked and moved to cash.  Like other market corrections and rebounds, a large portion of the movement is due to the twin engines of fear and greed. Odds are that the present environment is no exception.

Complicated factors make every situation different. We continue to keep a critical eye on the markets and are constantly monitoring the economy. When it comes to money and investing, be diligent on how you choose to react. If you react anxiously and move out of equities in response to short-term downturns, you may impede your progress toward your long-term goals.  Please reach out to us if you would like to review your portfolio and goals. While there are a few caveats, typically consistent investing in a down market can yield rewards later when purchasing shares at a reduced price.

As we’ve said before: Volatility will always be around on Wall Street, and as you invest for the long term, you must learn to tolerate it. Rocky moments, fortunately, are not the norm.

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