Market Volatility And The Impact of the Coronavirus

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The coronavirus epidemic, which began in January, has continued to exact a significant human and financial toll. As of the beginning of March, there have been more that 83,000 confirmed cases of persons infected with the virus and over more than 2,800 deaths, surpassing the death toll from the SARS (Severe Acute Respiratory Syndrome) virus in 2003. The World Health Organization has declared the coronavirus a global health emergency. Most of the cases initially occurred in the Chinese province of Hubei, which was quarantined. The virus has since spread to South Korea, Japan, Europe, and the Middle East, and is expected to begin gaining a foothold in the United States. A vaccine is not expected to be available to the public for many months.

How have the financial markets reacted? The US stock market, after an initial rally, has corrected at the fastest pace on record.  

Looking back in time, markets generally shrugged off viruses so long as they were perceived as being under control. The SARS virus, after driving an initial selloff in 2003, was largely contained and the S&P 500 index rose nearly 30% for the year.

Are things different this time? The answer has been a resounding yes.

Why have the financial markets reacted so suddenly and violently to the coronavirus epidemic?

• The virus has not been contained, and there is significant uncertainty as to how long the virus will last and its impact on global economies. This is causing analysis, data and forecasts to be virtually impossible to rely on. There is a saying that “markets abhor uncertainty”, which is helping drive stocks downward, with investors going into “safe haven” assets such as US government bonds, gold and cash.

• The Chinese economy is expected to slow significantly due to the virus, which will negatively impact trade with other countries and world economic growth.

• US companies such as Apple and Starbucks have temporarily closed stores in China and flights have been suspended. Since Apple also builds its iPhones in China, any slowdown in production and demand could negatively impact its earnings going forward. In fact, Apple has warned that it will miss its sales forecast in the first quarter of this year.  Since Apple has a major impact on the overall US stock market, this bears watching in addition to other companies’ supply chain disruptions.

• US Gross Domestic Product (GDP), while steady, has been slowing over time and is now averaging around 2% on an annualized basis. The key driver to GDP growth has been consumer spending. However, spending slowed in the fourth quarter of 2019 and any further slowdown due to the virus could hurt economic growth, and stock prices. Current estimates forecast a 0.25% to 0.5% reduction in 2020 US GDP growth, and global GDP growth could be lowered by 0.3%.

US stock prices had been at record highs and had been buoyed by expectations that the Federal Reserve will continue to lower interest rates. However, the coronavirus has more than tested the resilience of the stock market. For investors, portfolio diversification and strategic asset allocation remain important. Although the stock market will rebound at some point, market timing in terms of calling a bottom or “buying the dip” is likely to be futile in this uncertain and volatile environment.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future investment results.

Frederic P. Slade, CFA
Assistant Vice President and Senior Director, Investments
Pentegra Retirement Services
March, 2020

About Frederic Slade

Fred Slade has over 25 years of experience in the investment management and retirement services industries. He is Senior Director, Investments for Pentegra Retirement Services, a leading provider of retirement services to financial institutions and organizations nationwide, founded by the Federal Home Loan Bank System in 1943. Mr. Slade has managed over $1 billion in internal bond portfolios and provides analytics and strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and has presented at a number of seminars and conferences.