Special Edition Market Update: COVID-19

Despite attempts by Chinese authorities to contain the coronavirus, the virus has spread around the world, and we are hearing about the increase in cases daily. As we have seen throughout these past two weeks, the markets have taken notice to the virus and its potential impact on the global economy. Last week, the stock market experienced its worst week since the 2008 financial crisis, and by market close last Friday (February 28), global equity market valuations had dropped by $5 trillion from the peaks a few weeks prior. The following Monday (March 2), the Dow bounced back nearly 1,300 points – its biggest one-day percentage gain in nearly 11 years.

Then, on Tuesday (March 3), the Federal Open Market Committee (FOMC) cut interest rates by 0.5%, citing concerns that the spread of COVID-19 threatens to disrupt global supply chains and economies. The Fed stated that, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” The Fed validated its decision to cut rates because of these risks and “in support of achieving maximum employment and price stability goals.” This emergency cut is the first rate reduction issued between the usual FOMC meetings since 2008.

In a Tuesday press conference, Fed Chairman Jerome Powell stated the following: “The virus and the measures that are being taken to contain it will surely weigh on economic activity both here and abroad for some time,” a nod to the early toll COVID-19 has taken on the travel, tourism, and manufacturing industries. This cut in rates is the Fed’s response to provide more support to the economy, Powell stated, in hopes of boosting household and business confidence, and Treasury Secretary Steve Mnuchin praised the Fed’s decision to take action.

What does this mean for investors?

Let’s not forget the markets were at all-time highs less than three weeks ago. Additionally, 2019 was a “Goldielocks economy,” meaning everything was just right – there was strong employment, economic stability, and stable growth. This balance between growth, employment, and inflation signaled positive signs as we moved into 2020. That being said, after strong gains in 2019, we were anticipating a correction in 2020; yet, as with all corrections, we did not know what external force would ultimately trigger the pull-back in the markets, and no one predicted a global virus scare would be the culprit. As we’ve always said, it is healthy for the markets to trim some of the fat from time to time to ensure we don’t bubble into a euphoric state like the one that led to the tech bubble bursting in 2000. A quick selloff, especially one that is so obviously tied to a single global issue – in this case, coronavirus – is arguably preferable to a “death by a thousand cuts” that sees the market selling off a little every day for a long period of time. The latter is typically a sign of larger underlying problems within the fundamentals of the markets and the economy and is therefore much more worrisome to investors.

J.P. Morgan’s Chief Global Strategist, Dr. David Kelly, recently reminded investors that the coronavirus is not a multi-year issue; this is an acute occurrence that scientists are and will continue to respond to and that our own human adaptability will react to. Additionally, on Thursday morning, the Chinese economy’s equity benchmark reached a 52-week high following a 2.5% overnight gain! Spurred by this rebound, the CSI 300 – the index that replicates 300 stocks traded on the Shanghai and Shenzhen stock exchanges – has now fully recovered all of its losses from the coronavirus selloff. We bring this up for a reason: If the epicenter of the coronavirus can recover all of its losses and set a new 52-week high, then the odds of a recovery in the U.S. markets are high too.

Lastly, keep in mind that computerized and algorithmic trading has taken charge of the markets in recent years, and many, if not nearly all, of the acute fluctuations we see in the markets can be attributed to these programs. These programs trigger thousands of trades in seconds, generating jarring trading graphs that look like a heartbeat spiking from zero beats per minute to a max heart rate every other beat. This reality adds a further dimension to taking these sharp market corrections with a grain of salt, keeping in mind that the long-term outlooks and underlying fundamentals are the barometers that hold the most significance and most certain indications of where the economy and markets are heading moving forward.

Final Thoughts

The markets like to speed date and will leave one hot topic behind for the next headline-breaker. On Wednesday, investors temporarily moved on from the coronavirus worries and relished in Biden’s strong Super Tuesday showing, as the S&P 500 rose more than 4%, the Dow soared over 1,100 points or 4.5%, and the NASDAQ advanced 3.8%. With Wednesday’s rally, all three major averages moved out of correction territory, further bolstered by strong economic data showing the U.S. services sector grew at a faster-than-expected pace in February and private payrolls jumped beyond expectations. Also on Wednesday, Congress announced it reached a deal to provide $8.3 billion in emergency coronavirus funding, showing investors the government is taking needed action to hedge this crisis. Additionally, as was reinforced by the Fed’s statements on Tuesday, the committee’s most recently released minutes from its late-January meeting show FOMC members feel confident the U.S. economy has become stronger since the committee’s previous meeting in early December.

Overall, despite the roller-coaster market of the past two weeks, the global economy continues its secular growth story. The coronavirus will result in first quarter earnings missing estimates, but we expect earnings to reaccelerate after the virus is under control. We certainly need to stay aware and pay attention to the progression of the coronavirus, but, as of now, nothing has changed for long-term investors, and watchful waiting continues to be the sensible course of action. 

Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.