In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility. – Benjamin Graham
The 11-year bull market in stocks came to an abrupt end last week and the market officially entered a bear market as panic-stricken investors were greeted with a one-two punch of spreading coronavirus fears and an oil price war between Saudi Arabia and Russia. All three major stock averages plunged into bear market territory, defined as a decline of at least 20% from the market’s all-time high. For the Dow Jones Industrial Average, it was the fastest decline ever from its recent record high to a bear market – a mere 19 days. After Saudi Arabia and other OPEC countries and Russia failed to agree on oil production cuts, Saudi Arabia announced a huge increase in its oil production, increasing supply at a time when global demand for oil is falling due to the effects of the Covid-19 virus. The result was a drop in oil prices to just $31 a barrel, a move that could have severe consequences for U.S. shale-oil producers. The World Health Organization (WHO) also came out and declared that the coronavirus outbreak was a global pandemic as there were more than 100,000 confirmed cases worldwide and over 1,000 cases in the U.S. To help relieve severe dislocations in the Treasury market, the Federal Reserve stepped in to provide additional liquidity and the Bank of England announced an emergency interest rate cut as well as other fiscal and monetary measures. In the aftermath of a 10% plunge in stock prices on Thursday, President Trump declared a national emergency under the Stafford Act on Friday, which will allow the White House to mobilize the Federal Emergency Management Agency (FEMA) to direct federal aid to states hit by disasters and health crises. The move provided up to $50 billion in funding for states and it was announced that 5 million coronavirus test kits would be available within a month. After the announcement, the stock market rallied on Friday to post its largest single-day gain since October 2008 and recouped almost all of the losses on Thursday. The House also passed a bill that will provide assistance and support for families, such as paid sick leave, free Covid-19 testing and increased unemployment insurance. Although much has been done to calm the markets and address the crisis, the news involving the number of coronavirus cases is likely to get worse before it gets better over the coming weeks.
Economic data released last week took a back seat again to the spread of coronavirus and its effect on the economy. Both the producer price index (PPI) and the consumer price index (CPI) rose modestly in February, with the annual rate for the CPI falling to 2.3% from 2.5%.
For the week, the Dow Jones Industrial Average dropped 10.4% to close at 23,185 while the S&P 500 Index declined 8.8% to close at 2,711. The Nasdaq Composite Index fell 8.2% to close at 7,874.
Economic data this week will have little effect on markets with the Covid-19 pandemic. Retail sales in February are expected to increase modestly and both February housing starts and existing home sales are forecast to approximate numbers in January. The leading economic indicators for February are expected to be flat.
In an emergency session on Sunday, the Federal Open Market Committee (FOMC) cut the federal funds rate by 1% to a range of between 0% and 0.25% and also announced a $700 billion quantitative easing program that will buy U.S. Treasuries and mortgage-backed securities. This follows an emergency rate cut of one half percent by the Fed just two weeks ago. The latest move is aimed at providing much needed liquidity to the system and bolstering confidence in order to achieve the Fed’s goals of price stability and maximum employment. The Bank of Japan (BOJ) will also consider cutting its key short-term interest rate from its current level of negative 0.1%.
This week’s quarterly earnings calendar will be sparse as the most prominent companies on the list include FedEx, General Mills, Accenture, Darden Restaurants, Lennar and Tiffany.
The spread of the coronavirus has sparked a health crisis and has caused fear and panic that has deeply affected the markets as well as everyday life as we know it. Unfortunately, it is impossible to predict how severe and long-lasting the disruptions from the virus will be. It is also impossible to forecast the impact that this will have on the economy and what the bottom will ultimately be in the stock market. Parts of the economy have already shut down and the odds of a recession have increased significantly. The extent of the coronavirus outbreak remains uncertain and until more tests are administered to the general public, we will not know the true number of confirmed cases of the virus. The key will be when the number of new coronavirus cases peaks and we see a drop in the growth rate of infections. In times like this when instability and uncertainty are high, investors should not panic and should not make any drastic changes to their investments. It’s also a good time to reevaluate your goals and objectives and review your asset allocation to make sure it aligns with your age, time horizon and risk tolerance. Over the long-term, stocks have significantly outperformed bonds and money market funds and there is no reason to expect that this won’t continue in the future. In previous health scares that have led to market declines, the market has recovered, returned to normal levels and eventually produced positive returns. This time should be no different.