Special Memo: Coronavirus & Market Declines

After the substantial declines of 3% or more in US and international stock prices on Monday, February 24^th, we are writing to provide some additional information on the situation.  The media has attributed the declines to the spread of the new coronavirus, even as there are some signs of improvement in China, where this all began (NYT, front page, 2/25/20).  Although we are always skeptical of attributing causation for financial market price moves, it is probably reasonable in this situation to accept the spread of this illness as an important factor.

First, it is worth noting that the US stock market (S&P 500) is now basically back to its year-end 2019 level, and 2019 was a banner year for stocks, with a gain of approximately 26%.

Second, interest rates continue to decline on high credit bonds, making it even more difficult to earn an acceptable investment return from less risky, income-oriented investments. This has likely been an important upward driver of stock prices in the recent past.

Third, an asset allocation of 50-50 bonds and stocks means a decline of 1.5% in your portfolio. Each of our clients’ allocations is different and tailored to help withstand unsettling declines.

Fourth, the history of serious contagious diseases and their effects on stock prices indicates that the negatives are typically not long lasting. While we certainly understand that the past is not necessarily predictive, and “black swan” events do occur, it is worth having the facts to consider.  Also, over time, factors other than the disease obviously come into play. The chart below shows the five most significant previous disease outbreaks since 2003, how far the S&P 500 declined during each of those periods (again, not all of the decline can be attributed to the disease), and how long each of the declines lasted. It is worth noting that there have been stock price recoveries after each period, right up to the recent highs in February 2020.  As usual, we advise maintaining your allocations, and avoiding any effort to time when to be in and out of stocks.

S&P 500 Performance During Virus Outbreaks

Source: Nova, Annie. “History Shows Stocks Typically Rebound from Disease Outbreaks before Long.” CNBC, 24 Feb. 2020, https://www.cnbc.com/2020/02/24/past-disease-outbreaks-show-investors-shoud-ignore-the-noise-of-coronavirus.html.