Coronavirus: What the Viral Epidemic Means for Investors
Last week saw the worst week on Wall Street since 2008, as the Dow fell into correction likely due to the outbreak and spread of COVID-19, commonly called novel coronavirus. A market correction is a nerve-wracking event for investors, but the current uneasiness in the markets is no cause for panic.
While the spread of COVID-19 is atypical, market correction is not. In fact, it’s an entirely normal process, and not altogether unexpected after experiencing the longest-running bull market on record. There have been 22 market corrections since 1974, and they are aptly named because the market usually “corrects” itself and returns prices to their longer-term trends. While the coronavirus is likely to cause economic impact into at least the second quarter of 2020, historically, Wall Street’s reaction to these types of epidemics has been short-lived, including in the recent past.
The 2002 Severe Acute Respiratory Syndrome (SARS) outbreak, the 2012 Middle Eastern Respiratory Syndrome (MERS) outbreak and the 2014-2016 Ebola Virus Disease (EVD) outbreak did negatively impact economic growth and disrupt the capital markets over short time horizons of one or two years. However, these past virus-triggered market corrections indicate that economies and financial markets should not be significantly impacted over the long-term. Additionally, all current signs point to the coronavirus outbreak as being less acute than the outbreaks mentioned above.
While it’s important to take coronavirus seriously, especially on the heels of more deaths on U.S. soil this week, viewing it through the lens of other recent outbreaks is useful in understanding whether its health and financial consequences will be far-reaching. Based on current statistics, it does not look as though coronavirus will have an unusually high global fatality rate. Although confirmed cases in the U.S. have grown in recent days, it’s important to note that total active cases worldwide peaked on February 17 at 58,747 and have been declining since that time. In fact, as of February 28, there has been a 24 percent drop in active cases across the globe.
This is good news on both the health and financial fronts. COVID-19, with a mortality rate of 3 percent globally, has a lower fatality rate than the SARS rate of 10 percent, the MERS rate of 34 percent or the Ebola rate of 38 percent. Coronavirus does appear to be more contagious than other recent viral outbreaks, but it is much less fatal.
The fact that the global response to the epidemic has already lowered the incidence of active cases considerably, coupled with a mortality rate far lower than its modern viral counterparts, bodes well for containment of the virus – as well as financial recovery for investors.
In the U.S., President Trump’s response to the epidemic continues to evolve and is likely to remain fluid as the virus spreads further on American soil. Although, as mentioned, the number of confirmed active cases worldwide has shrunk considerably, the Centers for Disease Control (CDC) has warned that coronavirus is expected to continue spreading in the U.S. through community transmission. So, while the global statistics illustrate that COVID-19 likely peaked globally on February 17, more American fatalities could encourage more panic-selling and necessitate additional steps from the federal government. As of Tuesday (March 3rd), the Federal Reserve has cut the target fed funds rate by half a percent (.50%). At this time, it is still too early to say how the markets will react to this.
Even with the spread of COVID-19, many economists predict the U.S. economy is likely to show a 2 percent growth for the first quarter of 2020. Most of the economic impact from coronavirus will be felt in the second quarter, where it’s possible we will see losses of about 0.25 percent. However, current statistics do not seem to indicate that this market correction will lead to a recession. In the cases of SARS, MERS, and EVD, there was no significant, lasting damage to the global economy.
It is impossible to know – or even to guess – the full scale and ultimate impact of coronavirus. No one can definitively say when coronavirus will burn itself out and discontinue spreading. It’s also impossible to know how long the current market volatility will last, as well as if – or when – the market will correct itself. During a viral epidemic, some market loss is inevitable due to prevention and quarantine efforts that cause economic slowdown, though panic-selling also contributed to the U.S. market loss of $3.4 trillion last week.
History has shown us that attempts to time the market or bet on the future with speculative information tends to be a losing strategy. In the current market scenario, a quick rebound is possible, in which case widespread panic among investors will be short-lived. The opposite is also possible, which could produce excellent buying opportunities. Policymakers seem poised to take measures to ensure financial stability, though we can’t predict their overall impact. In short, much remains unclear and the market remains volatile.
Still, steadfast investors who understand that this correction is no reason to abandon a still record-high market in the aftermath of a 30 percent growth year stand to benefit from stocks that are cheaper to buy now and dividends that are higher as a percentage of the share price. Though coronavirus continues to spread and uncertainty about its containment is impacting investors, minor market rebounds and optimism about a coordinated global response bode well for regaining market stability.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.