Last week was a tough time in the stock market, with the S&P 500 Index down more than 11% as the number of coronavirus cases reported outside of China jumped. Last week’s losses reversed all of this year’s gains so far for the S&P 500 Index and the Dow Jones Industrial Averages. The Nasdaq Composite Index appeared to be holding on better with slightly above a 6% loss. After several months of relative calm in the markets, last week’s volatility probably felt worse than it might have otherwise, but an 11% one-week 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 U.S. and global economies and the stock market has 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, the most comparable outbreak, but the policy response also has been more aggressive, and the survival rate has been higher.
To put last week’s decline into perspective, even in positive years for stocks, 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 that we’re experiencing reached 11%, and it is still 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 better positions to weather the coronavirus storm. Most likely there will be a 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.
IS THIS TIME DIFFERENT?
This time is different because of the speed with which vaccines can and are being developed.
Unlike the past, scientists today are using Vaccine Rapid Response Platforms which are high-tech cutting-edge methods that can shave years off development time of vaccines. Ideally, these methods can develop vaccines while viruses are spreading rather than years later.
Within weeks of China learning about the Coronavirus, Chinese scientists uploaded the virus’s genetic sequence into a public database that allowed scientific teams around the world to begin developing vaccines.
Traditionally, scientists needed an actual sample of the virus in order to develop a vaccine. These samples would then be inactivated using special chemicals before putting into a vaccine. When the weakened virus would be injected, the human body would recognize this as a foreign invader or antigen. Vaccines use antigens to prime the body to protect itself against the virus.
Vaccines developed through Rapid Response Platforms are different. Rather than injecting antigens into the body, these types of vaccines essentially send instructions to cells in the body. Cells then produce antigen proteins that are specific to the virus they are designed to defeat. These instructions are in the form of RNA or DNA, the molecules that contain the code for building proteins. Scientists say this significantly cuts down on development time because they do not have to grow the whole virus. Plus, when scientists create instructions for one virus, they can now tweak those instructions to defeat a similar virus.
Unlike the conventional approach, through techniques like “Messenger” RNA, it’s our own body cells, rather than the lab tech, that produce the antigen proteins that are like the ones made by the Coronavirus. One’s immune system will then be stimulated to develop antibodies to the virus so that when the body sees it again it can immediately recognize the virus and prevent one from becoming sick.
While there has been plenty of news about the Coronavirus and its potential disruption to supply chains and the market, it will likely be contained and able to be treated.
Past epidemics have tended to have a short-term impact on stocks. Epidemics have historically risen sharply before reaching a peak, leading to a market decline. As the following chart shows, the market rebounded quickly after past epidemics (Attached - Past Epidemics).
Containment is also important to calm the markets. Given today’s globally connected health experts and national governments, coordinating containment efforts are as efficient and effective as ever.
Market declines are an unavoidable fact to investing. It is important not to overreact to headline news such as the Coronavirus. As long as your portfolio matches your time horizon and risk tolerance, then declines like this should not affect your financial plan.
Times like now highlight the importance of having adequate cash reserves, a planning principle we preach over and over. Adequate cash reserves insulate one’s portfolio from being liquidated at the wrong time, i.e. when the market is down.
It can difficult to stay the course in the face of recent market volatility. Our investment committee remains vigilant and will make allocation or security selection changes should our rules-based approach give such indications.
Please contact your Lead Advisor if you have any questions or concerns.
Founder & Chief Executive Officer
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 29, 2020.
This Research material was prepared by LPL Financial Research and the financial professionals at Gatewood Wealth Solutions. All information is believed to be from reliable sources; however LPL Financial and the financial professionals at Gatewood Wealth Solutions make no representation as to its completeness or accuracy.
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