Coronavirus fears combined with computer/ algorithmic trading have made for a challenging week. Here is an update on what is going on.
The last few days have been tough in the stock market, with the S&P 500 Index down sharply as the number of Coronavirus cases reported outside of China have jumped. The losses reversed this year’s gains so far in the S&P 500 Index, Dow Jones Industrial Averages, and the Nasdaq Composite Index. After several months of relative calm in the markets, the recent volatility probably felt worse than it might have otherwise. But a significant decline never feels good.
Every virus outbreak is different, but looking back at other major global outbreaks over the last three decades (SARS, bird flu, swine flu, Zika, etc.), we can see that the impact on the world economy and stock market tended to be short-lived. It’s possible the current outbreak has the potential to follow a similar path, although there is still significant uncertainty. The Coronavirus has spread more quickly than SARS, which is the most comparable outbreak. However the policy response also has been more aggressive, and the survival rate has been far higher.
To put the recent market decline into perspective, even in positive years, the S&P 500 historically has experienced an average peak-to-trough intra-year decline of about 11%. In other words, the S&P 500 has fallen 11% at some point during most years before ending higher. This latest pullback is still well within the normal range of market volatility. On average, the S&P 500 has experienced three to four pullbacks of around 5-10% per year.
It’s also important to remember that the global economy had started to see a pickup in momentum in late 2019/early 2020, before the outbreak. Leading indicators of economic activity were pointing higher. Purchasing managers’ surveys for the United States and Europe had improved. And corporate America delivered solid better-than-expected fourth quarter 2019 earnings results, with many companies saying good things about their 2020 outlooks.
Many view the Coronavirus as a delay in, not an end to, the global economic acceleration story that has been unfolding since December’s U.S.-China trade deal. That momentum has put the global economy and corporations in a better position to weather the storm. Most likely there will be global economic impact from the Coronavirus over the next several months. But investing fundamentals make the case for a rebound in the second half of this year, potentially with some help from government stimulus.
As difficult as it may be to stay the course in the face of recent market volatility, long-term investors may want to consider that approach. Based on history, it is possible that we may see a return to pre-outbreak levels of global economic growth and corporate profits within the next several months, which could continue to power this bull market and economic expansion through 2020 and possibly beyond.
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