I can’t recall ever once having seen the name of a market timer on Forbes annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it. – Peter Lynch
Fear gripped Wall Street last week as panic-stricken investors sent the major stock averages plunging when news broke that the coronavirus had spread from China to South Korea, Iran, Japan and Italy. All three benchmarks suffered their worst weekly declines since the financial crisis of 2008 as four months of gains were wiped out in a mere seven trading days. The S&P 500 is now down 8% for the year after reaching an all-time high less than two weeks ago. For weeks, investors had shrugged off the threat of the spread of the coronavirus but the possibility of a pandemic with confirmed cases of the virus in the U.S. and elsewhere caused investors to sell stocks and seek safe havens such as gold and Treasury securities. By Friday, the yield on the 2-year Treasury had plunged to 0.86% while the yield on the 10-year Treasury had sunk to just 1.13%, establishing new lows for each security. (Bond prices and yields are inversely related). Other virus-related news last week contributed to the fear, panic and uncertainty that led to the huge correction. The Centers for Disease Control warned that the coronavirus outbreak was likely to hit the U.S. and the first case of unknown origin was reported in Northern California. In this case, the patient had no travel history or contacts that would have put the person at risk, raising fears that more people are carrying the virus. Technology bellwether, Microsoft, also cut its revenue guidance due to supply chain disruptions and Goldman Sachs cut its forecast for earnings growth in 2020 to zero as a result of a severe decline in Chinese economic activity, an anticipated slowdown in U.S. growth and increased business uncertainty. To combat the negative effects that the virus will have on their economies, both Hong Kong and South Korea announced billions of dollars in stimulus packages and the Federal Reserve is likely to cut interest rates when it meets later this month. Even though rates are already low, knowing that the Fed will use whatever tools it has at its disposal to support the economy bolsters confidence and helps psychologically.
Economic data took a back seat to the fear caused by the coronavirus, but reports were generally positive. Excluding defense-related orders, durable goods orders in January were better than expected and a key measure of business investment also increased. The Chicago Purchasing Manager’s Index (PMI) in February posted its highest reading since August but stilled remained in contraction territory. U.S. new home sales jumped in January to the highest level since July 2007, helped by low mortgage rates. Consumer confidence in February was also better than in the previous month but slightly less than expected.
For the week, the Dow Jones Industrial Average dropped 12% to close at 25,409 while the S&P 500 Index fell 11% to close at 2,954. The Nasdaq Composite Index also declined 11% to close at 8,567.
The most important piece of economic data this week will be the February employment report, which is expected to show that 170,000 new jobs were created and that the unemployment rate remains unchanged at 3.6%. The ISM manufacturing index for February is forecast to be slightly above 50, the threshold for expansion, while the ISM non-manufacturing or services sector index is forecast to be solidly in expansion territory.
The most prominent companies scheduled to report fourth quarter earnings this week are AutoZone, Kohl’s, Nordstrom, Target, Dollar Tree, Costco, Kroger, Campbell Soup, H&R Block and Hewlett Packard Enterprises.
The primary focus for investors again this week will be the status of the coronavirus and its global impact as opposed to corporate earnings reports and economic data. With regard to the virus, the most similar historical occurrence was the outbreak of the severe acute respiratory syndrome (SARS) virus in 2003, an epidemic that caused the S&P 500 Index to fall 15%. Six months after the outbreak began, stocks recouped their losses and the S&P 500 actually was slightly higher. It is also important to note that infection rates are slowing in China even as infections are increasing outside China. But mortality rates are confined mostly to elderly people and people who have pre-existing conditions. Also, China has very poor air quality and high smoking rates, which could be factors in their high mortality rates. While global supply chains in China have been disrupted and production facilities have been impacted, the effect on the U.S. should be manageable. Historically, steep sell-offs in the S&P 500 Index have been followed by a rebound in stock prices within six months provided there is no recession. With the strength of the labor market and the U.S. consumer, whose spending accounts for nearly 70% of economic activity, the odds of a recession remain low even though they have risen due to the impact of the coronavirus. The bond market may also be signaling economic weakness as yields have plunged as investors have sought safe havens in U.S. government bonds. Despite plunging interest rates, though, the spread between the 10-year Treasury and the 30-year Treasury has actually steepened and not inverted, which is a recessionary signal. While the volatility experienced last week is certainly unnerving and unsettling and may continue, investors should avoid making any emotional trading decisions based on fear and, instead, stay the course with a long-term investment perspective in mind. Those that do will be rewarded as this, too, shall pass.