Coronavirus and the Markets – Looking Ahead

Last week was a challenging week for equity investors.
Global markets have experienced several days of sharp selloffs over the spread of the coronavirus. Anxieties over individual health and the impact on global economies has sent investors out of stocks and into safe haven assets such as government bonds. We continue to monitor the situation closely but wanted to look back at the economic impact of past epidemics.

How Did We Get Here?
In early January, reports began to surface of a mystery illness that struck dozens of people in the central Chinese city of Wuhan. Coronavirus, named for the crown-like spikes on the virus’s surface, quickly spread and led to the unprecedented step of quarantining an entire city of 11 million people. Attempts to halt infections outside of Wuhan have proved ineffective with over 82,000 confirmed cases now showing up in nearly 50 countries.

Last Tuesday, the Center for Disease Control and Prevention (“CDC”) rattled already-nervous markets when they announced that Americans need to shift their thinking from “if” to “when” this virus strikes our shores. Markets were already in the process of trying to understand the implications of global supply chain interruptions. The thought of U.S. factories and schools temporarily shutting down, employees missing work, and pressures on health providers caused further alarm.

Review of Past Epidemics
This is not the first epidemic the world has faced and will unlikely be the last. While none of us at ARGI are virologists, we have looked back at past pandemics to understand their economic impact. A 2007 research report from the St. Louis Federal Reserve examined the 1918 “Spanish flu.” This was the worst pandemic to strike the U.S. infecting millions of Americans and tragically resulted in over 675,000 deaths. However, the report’s conclusion was the economic effects from the epidemic were short-term. Other past pandemics showed a similar pattern of temporary economic slowdowns followed by swift recoveries.

At this time we have no reason to believe the economic impact from coronavirus will be any different, but the stock market’s reaction disagrees. The S&P 500 has fallen into official “correction” territory (10% pullback from recent 52-week high). Valuations in the stock market were becoming a little stretched before the news of the virus, as investors were optimistic about the prospect for 2020 corporate earnings. Quarantines and other business disruptions have started to ratchet down these expectations and stock prices are reacting as a result.

Looking Ahead
When major events like this occur, it’s easy to wonder how your investments and retirement strategy might fare. While the recovery rates so far appear to be very high, we are all thinking about the families across the globe who are dealing with this illness. Our hope is that all our clients will take the same precautions many of us and our families are following to ensure if the virus does impact the U.S., and reduce its spread. But if the coronavirus is similar to past epidemics, the duration will likely be measured in months and not years. That is why we continue to emphasize to everyone to remain focused on your family’s long-term financial goals and not to react abruptly to short-term volatility.

Please remember we are here to answer questions and concerns. You can reach out directly to your advisor or contact us if you have questions.

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