March 12, 2020
Coronavirus Update – Getting Worse Before it Gets Better
The coronavirus induced sell-off is reaching new depths today as investors continue to grapple with the rapid spread of the virus and uncertainty around a fiscal response to curb slower economic growth from the outbreak. The S&P 500 officially entered bear market territory this morning with losses extending more than 25% from the late February peak. There is good reason to believe that our nation’s experience with the virus, the resulting economic impact, and the market’s reaction will get worse in the short term. That said, we continue to believe that these implications will prove transitory and we remain committed to our disciplined approach.
An Historic Day
Wednesday, March 11 may go down in history as the day when seriousness of the coronavirus outbreak in the United States truly reached a turning point. The World Health Organization raised the outbreak to pandemic status – the highest designation – as the disease has claimed over 4,000 lives across more than 100 countries around the world. In an address intended to quell concerns President Trump announced a 30-day travel ban from Europe to the U.S. and proposed fiscal assistance in the form of a payroll tax holiday. In addition, the nation began to hunker down in earnest. Social distancing measures swept the country with a slew of major event cancellations, suspended university classes, corporate announcements urging or requiring employees to work remotely and avoid non-essential travel etc. The NCAA tournament will carry on in empty arenas and the NBA announced it was suspending the season until further notice after a player tested positive for the virus.
Fiscal Policy Uncertainty
Part of today’s market reaction reflects disappointing reception to the U.S. Federal government’s response thus far. Investors appear to be seeking specific fiscal proposals and the market is questioning how effective a ban on European travel might be in slowing the spread the virus in the U.S. In his address last evening, President Trump unveiled steps including lending aid for small businesses and proposed a suspension of U.S. payroll taxes, though both Democrats and Republicans have pushed back on the idea, casting doubt on whether or not it would happen.
Drastic Measures
With more than 1,300 confirmed cases in the U.S., we are encouraged by social-distancing measures intended to help curb the outbreak. We expect the number of U.S. cases to continue to rise precipitously in the short term, but also believe the actions will help to limit the virus’ worst case potential. These measures will have a meaningful impact on the domestic economy, but if effective, they should also accelerate the path to recovery. For comparison, China had a similar number of confirmed cases by January 24, and active cases peaked about three weeks later on February 16. The country has been slowly returning to work with the economy running at an estimated 70%-80% today, up from 50% two weeks ago. While perhaps not a perfect comparison, we believe China’s experience provides a useful example and supports our view that the drivers of humanitarian, economic, and financial uncertainties present today will prove temporary in nature. As the virus becomes contained, the economy will reaccelerate (as is already happening in China) and investors should reconsider stock prices through a more rational lens.
Discipline is Key
Remember, the most important investment decision you will ever make occurs when you and your advisor determine the appropriate high-level asset allocation for your portfolio (simply the ratio between stocks, bonds, alternative assets, and cash). That decision is based on a deep understanding of your unique goals and circumstances, and your ability and willingness to take risk. The short term can be exceedingly unpredictable, but over the long term we know to expect bumps along the way (some larger than others). Don’t lose sight of the fact that your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens and maintaining discipline during periods of uncertainty is the most reliable course for growing and preserving wealth. Please contact any member of our team if you have questions.