Weekly Commentary (03/02/20) – Coronavirus Fears Push Markets Into Correction Territory

March 2, 2020

Markets moved into correction territory last week amid fears of the economic impact of the coronavirus on global growth. Markets suffered their worst weekly drop in over 10 years (and the world didn’t come to an end …).

For the week, the DJIA fell 12.26% while the S&P 500 lost 11.44%. The tech-heavy Nasdaq dropped 10.52%. International markets fared a bit better, but they also lost ground. For the week, the MSCI EAFE index (developed markets) gave back 9.55% while emerging market equities (MSCI EM) declined 7.23%. Small company stocks, represented by the Russell 2000, finished lower by 12.01% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher by 1.26% as investors fled to the perceived safety of bonds. As a result, the 10 YR US Treasury yield collapsed to its lowest yield in history as it closed the week at a yield of 1.13% (down from the previous week’s closing yield of ~1.46%). Gold prices were surprisingly weak as gold closed at $1,564.10/oz – down 4.92% on the week. Oil prices dropped 16.15% to $44.76 on global growth concerns and plentiful supply. Fortunately, low oil prices serve as a tax cut to consumers and businesses.

After a long period of relative calm in the markets, it is not surprising to see volatility surge as fears of the unknown grip investors’ psyches. We don’t know when the spread of COVID-19 will subside. We do know, however, that it will ultimately subside. In the meantime, markets are correctly adjusting to slower (or perhaps zero) economic growth. As we have highlighted many times in the past, the average intra-year decline in the S&P 500 has been roughly 14%. Since 1950, and before the current setback, markets have experienced 23 corrections (10%-plus pullback in prices) with an average decline of 13.7%. So far in 2020, the peak-to-trough correction has been 15.8% in the S&P 500 and 13.6% for the DJIA. Markets have recovered, on average, four months after each correction.

Could more pain be ahead for investors? Of course. The uncertainty of the global growth impact from the coronavirus is likely to remain high; however, markets have already discounted quite a bit of bad news. We suspect that central banks around the world will come to the rescue to help stabilize markets. We question whether or not central bank easing will work, but we agree that the main impact of such easing will be psychological.

We suggest that investors turn off CNBC. Patient, long-term focused investors will be well served in the end, and investors that sell based on panic rarely win over time. This recent bout of volatility reinforces the benefits of diversification as well balanced portfolios have been able to weather the storm relatively well. Investors should stay close to their long-term target asset allocations with a slight defensive bias as markets work through this period of volatility. Stay calm and carry on.

“Life is 10% what happens to you and 90% how you react to it.” – Charles R. Swindoll