Volatile Markets and the Ongoing Spread of the Virus are Causing Economic Uncertainty
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, a 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 will 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 upon 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.
Federal Reserve Chairman Jerome Powell has noted that the Fed is closely monitoring the coronavirus epidemic. The rest of the world’s central banks are doing the same, and it’s possible that a globally coordinated rate cut could head-off further economic impact. Goldman Sachs economists, as well as former Fed official Bill Nelson, have predicted this outcome.
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. In particular, the President could choose to make targeted tax cuts or take other emergency measures to prevent further economic damage.
Even with the spread of COVID-19, the U.S. economy is likely to show 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.
For now, there are some positive indicators. We are already seeing the Dow climb in early trading this week, and Asian markets are rebounding. European stocks also briefly entered positive territory again, and a global wave of buying came Monday on the heels of news that world leaders are already in talks about a coordinated economic response.
Much can change day to day in an epidemic scenario, and there are no guarantees, but we appear poised for continued rebounding rather than recession.
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 start of a bear market 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 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.