Broker Check

The Coronavirus Sparks a Correction

| March 04, 2020
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                The equity market pullback that we predicted as likely in our year-end blog materialized rapidly in February. Fear of a global pandemic due to the coronavirus, COVID-19, served as the main spark to the swift fall. The S&P 500 fell 12.76% from its February 19th closing price of 3,386.15 to close February 28th at 2,954.22. The S&P 500 reached an intra-day low of 2,855.84 which represented a 15.66% drop from its February 19th close. While the correction was quick and painful, the S&P 500 is only down 3.12% year-to-date as of March 4th’s closing price. In hindsight, factors other than COVID-19 contributed to the decline. The S&P 500 Index rose 28.88% in 2019 and was up 44.02% from its December 24th, 2018 closing low at its 2020 high. The rise was rapid and steady with a couple small pullbacks. The market was due for a pullback as valuations became stretched and the market got extended. Now that the market has fallen, we believe there are a lot of good buying opportunities developing. But we don’t see a quick recovery, rather we expect the markets to remain volatile. The COVID-19 is an unknown that cannot be easily forecasted and there will likely be both good and bad news related to the virus in the months ahead. While not dismissing the unfortunate deaths that have already occurred and those that will follow, NPP suspects the current fears will look overstated later in the year.
               The main risk for any bull market is a recession, and that risk is now higher than it has been for a while. However, we suspect any recession would be technical in nature. In other words, it is possible second and/or third quarter real GDP growth will be slightly negative, but we think the economic effects will be transitory. This is different than the Great Recession which caused lasting damage to the economy, the banking system, and global equity markets. In 1990-1991, there was a very brief and shallow recession triggered by the Gulf War. It inflicted minimal economic damage and once the brief recession ended the 1990s ended up being a strong decade for the economy and U.S. equities. The S&P 500 fell 19.92% on a closing basis from peak to trough in a little under three months. The S&P 500 hit an all-time high a little over four months after its October 1990 low which preceded the end of the Gulf War. We think that is the closest analogy with a couple differences. The trend economic growth rate is slower now than it was in the 1990s. NPP expects the current economy to grow near the two percent level. Additionally, market valuations today have improved, but stocks are not as cheap as they were in 1990. We expect positive returns from here, but investors should look for annualized returns in the mid-single digits, not double digits as were seen in the nineties.  In a low-inflation, low-interest rate environment, equity valuations look compelling over the long-run compared to the alternatives.  It is possible that the coronavirus could end up being much worse than feared, but ignoring the daily headlines and calmly evaluating your financial position and long-term goals are key here.

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