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Will the Coronavirus Be a Catalyst for a Market Correction?

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By Carol L. Girvin, Advisor and Patrick Ryan, CFP®, AWMA®

On February 24th and 25th, U.S. stock markets declined over 6% on fears that the virus known as COVID-19 or Coronavirus, would reach pandemic levels [1]. The news media is adept at catching our attention with sensationalized headlines. Remember, it’s historically the percent, not the points, which count. There are many unanswered questions regarding the long-term effects the spread of the virus will have in the U.S and across the globe, and it may take some time to reveal the overall economic impact. We’ve seen China’s response to include closing schools and factories and cutting off the city of Wuhan, believed to be the epicenter of the outbreak. 

Investors in the U.S. are left wondering if we have seen the worst of the downturn. February 26th began with modest gains in the U.S. markets before turning negative for the day as we digested news of case counts outside China’s borders exceeding China’s new cases [2]. Contributing to fears, it was reported that the CDC was developing a plan for when, not if, the virus reaches pandemic levels [3]. This should not contribute to our fears of an unknown virus but rather assure us that the authorities understand the gravity of the situation and will have plans ready to implement should the time come. 

Much like financial planners, it is the CDC’s job to plan for all contingencies.

Fear of the unknown can often be the most difficult to overcome. Providing context goes a long way to understanding the potential threat caused by COVID-19. As of February 26th, there have been over 80,000 confirmed cases of COVID-19 in 37 countries, leading to over 2,700 deaths. At least 14 of those cases are in the U.S., 12 of those are directly linked to travel in impacted areas of China [4]. Compare those numbers to the seasonal flu in the U.S. and we begin to see that fear of the unknown is causing more disruption than known threats. In the 2019-2020 flu season, CDC estimates that there have been at least 29 million flu illnesses in the U.S. leading to 16,000 flu deaths, including over 100 children [5]. While the total number of cases is slightly higher than average and dependent on numerous factors such as vaccine effectiveness and self-reporting, the mortality rate is no higher than a typical flu season. Looking at data and having perspective is always important.

So, what are we supposed to do? The media leads us to believe this is an unstoppable force that will disrupt every aspect of our daily lives. Healthcare professionals urge caution against panic and remind us that the best practices that we should follow to protect against the Coronavirus are the ones we (should) follow every day: wash hands thoroughly, cover your mouth when you cough, wear surgical masks to minimize risk of infection, stay home if you feel sick, etc. We, the public, are left to determine where reality will fall between the extremes. 

Should we avoid dining at our local restaurant? Probably not. Should we reassess our springtime vacation overseas? Maybe. Fear of the unknown causes irrational behavior. We have seen this time and time again throughout history. We should prepare for the possibility that there will be outbreaks in the U.S. This does not mean that we need to isolate ourselves and stop living our lives.

Humans are extremely adaptable, we are already seeing companies in China finding ways to get people back to work, including businesses and schools using technology to work remotely [6]. Certain sectors, such as technology, were hit particularly hard in this week’s rout. 

Other areas will benefit from panic and fear caused by an exotic virus. U.S. biotech firm Novavax (NVAX) said in a press release that it has made progress in its efforts to develop a vaccine to protect against Coronavirus. 

Shares of Novavax increased by 20 percent Wednesday [7]. Moderna (MRNA), another U.S. biotech, has already shipped an experimental vaccine for testing. Shares of MRNA are up 30 percent this week [8]. While we still do not know how this will play out, the world will continue to produce, evolve and improve.  

With U.S. markets at all-time highs, investors have been waiting for the ‘other’ shoe to drop. Will the Coronavirus be the catalyst for a market correction? Will the disease continue to spread beyond the traditional flu season? These are questions that will be impossible to answer without hindsight. If we take the ‘unknown’ part out of this fear, is this any different than other emotional swings in the market? Only time will tell.  Recent history with stocks and viruses is that markets overact leading to significant buying opportunity along the way.  Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8 percent.  During the Zika virus, which occurred at the end of 2015 and into 2016, the market fell by 12.9 percent.  There are other examples, but they all passed, and the market recovered and hit new highs [9].

The extent to which markets are affected will ultimately depend on the length, depth, and breadth of the impact caused by the outbreak to the global economy.  Though it’s too early to assess the virus’s full implications, travel restrictions, temporarily shuttered factories, and supply chain disruptions appear to be having a significant effect on the Chinese economy, and to a lesser degree, US corporations with business interests in China, as well as global trade more broadly [10].

It is during these uncertain times that we look to professionals for guidance. 

Investors are understandably nervous about what will happen. The prudent thing to do is reassess your financial goals to determine if they have been impacted by the recent turmoil. If your goals are still on track, making changes based on emotion could be detrimental. If the recent news and impact on your retirement, however, are keeping you up at night, this might be a good time to talk to your advisor.  We are here to assist you and guide you through the fundamentals of your financial decisions.  Never hesitate to call on us. 

 [1] https://www.cnbc.com/2020/02/26/trump-may-be-angry-about-the-sell-off-but-the-dow-is-up-strong-since-his-election.html?recirc=taboolainternal

[2] https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200226-sitrep-37-covid-19.pdf?sfvrsn=6126c0a4_2

[3] https://www.cdc.gov/coronavirus/2019-ncov/specific-groups/guidance-business-response.html

[4] https://www.cdc.gov/coronavirus/2019-nCoV/summary.html

[5] https://www.cdc.gov/flu/weekly/fluactivitysurv.htm

[6] https://www.weforum.org/agenda/2020/02/coronavirus-chinese-companies-response/

[7] https://www.cnn.com/2020/02/26/investing/novavax-coronavirus-vaccine/index.html

[8] https://markets.businessinsider.com/news/stocks/coronavirus-vaccine-moderna-stock-price-jump-profits-investors-millions-biggest-2020-2-1028942739

[9] https://www.ftportfolios.com/Commentary/EconomicResearch/2020/2/25/time-to-fear-the-coronavirus

[10] https://documentcloud.adobe.com/link/review?uri=urn%3Aaaid%3Ascds%3AUS%3A910a7247-4131-4806-a395-51b0e519ee94

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