Market Update – Coronavirus Fears Cause Market Correction

March 6th, 2020 by Jonathan Chatfield, CFA

The stock market has continued to slide as fear and uncertainty outweigh economic and business fundamentals. Although the decline in stock prices has been rapid, the 13.5% drop in the S&P 500 (at this writing) since its February highs puts it in correction territory, not bear market territory, and is similar to past corrections. Fresh news of increases in coronavirus infections in the US and other countries outside of China are causing investor concern.

Economic growth will likely slow. The travel and hospitality industries are directly affected by cancellations, and other industries are affected by temporary supply chain disruption and and slowing consumer spending. Companies including Apple and Microsoft have guided sales and earnings guidance lower due to temporary factory closures in China and other countries, leading to supply shortages.

We believe these disruptions are temporary. Pent up demand will lead to sales growth in future quarters and we expect stocks to rebound from their lows.

Meanwhile the 10-year treasury bond yield is at a record low (below 1%) as investors globally have sought out safety over risk in the current environment. The silver lining is that mortgage rates have also hit historic lows, and mortgage and refinancing activity has markedly increased – a positive for housing and a good leading indicator supporting economic growth.

Stock market corrections are a normal and healthy development for markets. Value conscious investors wait on the sidelines and when they see prices drop and stocks more attractively valued there, is a point at which buyers step in. As the focus shifts from fear of news headlines back to company fundamentals, we expect stock prices to recover. Recoveries from declines, driven by company fundamentals, instill confidence in the integrity of our financial system and a virtuous circle ensues.

Historical Data — Market Performance Following Past Outbreaks

While we are concerned about the impact of the coronavirus on global economic activity in the short term, we are encouraged by the historical data demonstrating market rebounds when contagions subside and investor fear ebbs.

Looking back at five virus outbreaks that have occurred in the past, market declines ranged from -5.8% to -12.9%. After the outbreaks subsided, returns in the 12 months following the correction ranged from 10.4% to 20.76%.

In each of these cases, the market rebounded strongly subsequent to the selloff during the virus outbreak.

Epidemic Month end 6-month % change of S&P 12-month % change of S&P
SARS April 2003 14.59 20.76
Avian fluJune 2006 11.66 18.36
MERS May 2013 10.74 17.96
Ebola March 2014 5.34 10.44
Zika January 2016 12.03 17.45
—Source: Dow Jones Market Data

Low Stock Prices and Valuations Create Buying Opportunities

Valuations are low and we see opportunities to buy stocks at lower price levels, which we expect to enhance investment returns going forward. When we buy stocks at lower prices, growth potential is increased and dividend income per dollar invested is higher.

What We Are Doing at Anchor Bay

At Anchor Bay we are monitoring the markets closely. We have reduced equity exposure in some of our model portfolios to reduce volatility, and harvested losses to offset gains for tax planning. Keep in mind, the stock/bond/cash mix in your account has been tailored to your risk tolerance, and that allocation is intended to allow your account to weather market volatility in times like this. We know the market will experience setbacks from time to time and your portfolio is designed to weather the storm. Your portfolio’s long term risk and expected return are matched to your investment goals and risk tolerance.

While the current selloff is unnerving and causes market participants to worry, we are confident the market will put in a bottom and recover, resuming its long term uptrend, supported by fundamentals, as it has after past corrections.