After a timid start to the month, February ended with a sudden volatility spike not seen since the last market correction back in December of 2018. Concerns over how the novel coronavirus (COVID-19) will impact business conditions and economic growth caused equities to quickly pull back from their recent all-time highs, with the S&P 500 slipping 8.41% by month’s end. (1)
Last month, we revisited some other recent virus outbreaks and how the stock market reacted, and eventually recovered, from those fears. The SARS, Ebola, and Zika virus epidemics did cause the market to pull back between 5.34% and 14.59% before eventually regaining those losses. At this time, it appears that the death rate for COVID-19 is far lower than those previous outbreaks, but could this virus cause the markets to react differently? (2)
The largest economic concerns (for now) over this virus stem from its birthplace - China. Many of the largest U.S. businesses rely on China for their manufacturing and supply chain, in addition to China’s consumer confidence and consumption to buy their products and services. By the middle of last month, manufacturing data began to reveal the scale of the impact on the Chinese economy. Companies in the U.S. began lowering revenue and earnings forecasts, which culminated in a wave of stock market selling last week. The full scale of the economic impact to China is still unclear at this point. (3)
Here in the U.S., we have only experienced only a handful of COVID-19 cases. During these times, it is important to be prepared, but not anxious. Currently, the virus appears to have a larger impact on the elderly and those with weakened immune systems. Healthy adults have more-or-less experienced mild to severe flu-like symptoms. Regardless of your age or health, it is recommended that you be prepared in the event the virus does begin to spread in the U.S.
Thoughts Regarding the Markets
No one can predict how the stock market will react over these coming months. The number of COVID-19 occurrences could increase dramatically in the U.S., or a vaccine could be developed sooner than expected causing a large rebound in economic production. History has shown that market pullbacks are typical in these situations, but it has also demonstrated large rebounds once fears subsided.
In last month’s Economic Update, we noted the markets were continuing to reach new highs and the risk / reward ratio was diminishing in terms of continued short-term upside. When buying becomes relentless and it feels like the stock market will go up forever, stock prices eventually will correct to pullback into alignment with company valuations. We also commented that gold and bond prices continued to rise with the stock market, something that is not typical and caused pause regarding further upside for equities.
For months, we have been watched for signs of a pull-back and positioned our clients’ accounts accordingly. For those allocated for long-term growth, it is important to keep your eye on just that; the long-term. While the market pullback made headlines last week, it remains higher year-over-year from March of 2019. Our conservative clients with lower risk tolerances were positioned into bond allocations with less price fluctuations and volatility.
COVID-19 fears aside, there was in fact plenty of positive economic data reported last month. Many investors believe that now could be an ideal time to “buy the dip” and ride the next wave to the top. While that could very well happen, we believe it is not a prudent approach to long-term investment management and risk mitigation.
Investment management is not a game of predicting what is going to happen next, rather it is assessing the risk / reward of current market conditions and aligning them with an investment portfolio which meets the investment objectives and risk tolerances of our clients.
As always, we are actively managing new developments in the markets with an open mind and a watchful eye.
Monthly Financial Tip:
If you have accumulated multiple retirement plan accounts over the years, you may want to consider consolidating some of those balances into one account to simplify your retirement savings effort.
1 - money.cnn.com/data/markets/sandp [2/28/20]
2 - tinyurl.com/vbdvm7r [02/24/20]
3 - tinyurl.com/uw5dd4t [02/23/20]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.