Last week, global markets added the word “coronavirus” to their collective vocabulary. And with that, the calm that had settled over financial markets in recent months was shattered. Emerging markets and Asian equities bore the brunt of the blast, while in the United States, concerns about the virus were evident on Wall Street on Friday, with the S&P 500 down about 1%, its worst drop since October.
Markets were supposed to come back down to earth after a more than 30% rise in 2019, but the arrival of the coronavirus has added a layer of unforeseen complexity. Irrational fears can move markets sometimes violently, and that leaves investors wondering if it’s a good idea to simply hunker down and wait out the storm. So, should they?
Yes, and here’s why.
Based on past incidents like the SARS outbreak of 2003, the virus isn’t likely to be more than a one-time event. While specific industries will probably take a big near-term hit from these worries–think shares of airlines, casinos, and other companies with exposure to China–the coronavirus doesn’t seem to have the staying power to move markets for more than a short period.
In the U.S., the S&P 500 was already extremely “overbought” heading into last week (too much money piled into those stocks too fast to be justified by recent price averages), so a pullback was no great surprise. After trading near all-time highs, stocks were at least vulnerable to a pause, and the coronavirus turned out to be the catalyst that triggered those declines.
And although the S&P 500 dropped 1% last week, it still finished up more than 2% going back to the start of 2020. And let’s not forget that the utilities, REITs, and technology sectors all gained last week. Also overshadowed were surveys of activity in the American manufacturing and services sectors, both of which showed growth in January.
The chart below shows a number of incidents over the past 10 years that some people considered reasons to sell stock investments. However, the big picture shows that the S&P 500 rose 495% over that time period. (Click to see a larger view)
Also remember that corporate earnings are really the big driver of stock performance–not fears of global pandemics. So far, fourth quarter earnings season is showing better-than-expected results. And fiscal year 2020 growth estimates for the S&P 500 are not unrealistic at 5% to 6%–a positive sign for stocks in the new year.
As noted during Azzad’s 2020 Investment Outlook webinar earlier this month, financial conditions are nowhere near restrictive, so recession in the U.S. within the next 12 to 18 months is a low probability. Looking at the macro data, global manufacturing and export activity seem to be stubbornly improving. Consensus U.S. GDP is forecast to be 1.8%, which is at the low end of the range and should be an easy threshold to beat, providing yet another potential catalyst to propel stocks higher.
That said, given the run we’ve had, investors should be prepared for a correction of 5-10% at any point. This type of decline would only bring the index back down to a more normal range. That’s a good thing for markets–and a healthy characteristic of bull markets like the one we’re currently in.
Based on this information, we see no need for clients to change their long-term investment strategies. We hope and expect that the outbreak will be contained in short order, which will be a good thing for client portfolios, but more importantly, for those in the path of this serious illness.
Keep these points in mind if you start to feel the temptation to sell.