Coronavirus Hits the Stock Market: Now What?
Stock markets worldwide have declined sharply this week as investors grapple with the ongoing spread of coronavirus disease (or COVID-19). Over the last two trading sessions, the S&P 500 Index is down 6.3%, and the Dow Jones Industrial Average has fallen by 1,911 points. Capital has surged into traditional safe havens, driving up the price of government bonds and gold. The benchmark 10-year Treasury bond closed today at a record low yield of 1.33% (Bond prices and yields are inversely correlated).
Headlines with words like “outbreak” and “pandemic” are admittedly scary for us all. But before taking any impulsive or drastic action, consider the following facts:
Coronavirus disease is still exceedingly rare in the U.S. As of February 24th, there have been 14 confirmed cases of COVID-19 in the U.S., plus another 39 cases among persons repatriated to the U.S. (from Wuhan, China and the Diamond Princess cruise ship). (Source: cdc.gov) This is a total of 53 confirmed cases among a population of 331 million people, an incidence rate of 0.00002%. Compare these figures to another disease with which we all are accustomed to dealing: influenza (flu). So far this season, CDC estimates there have been at least 29 million flu illnesses, 280,000 hospitalizations, and 16,000 deaths from flu. (Source: cdc.gov)
While coronavirus disease is highly contagious, and its transmission mechanism is not yet well-understood, the disease seems to have an overall mortality rate significantly less than other well-known epidemics. COVID-19 has a preliminary death rate of 2-3%. This compares to 10% for the SARS outbreak in 2002-03, or an average of 50% for various Ebola outbreaks. (Source: Wikipedia)
Now for the bad news. Global containment efforts related to COVID-19 will undoubtedly have a material impact on economic growth and corporate earnings. As large cities are put under quarantine, factories are shuttered, flights are canceled, border crossings are tightened, and travel is restricted, economies will inevitably slow. How long such a slowdown lasts is the big question. This past weekend’s news of the disease intensifying in South Korea, Italy, and Iran demonstrated that we may be coping with coronavirus outbreaks for months to come and led to the dramatic selloff in equity markets. The Federal Reserve has signaled that it is closely monitoring the economic impacts of COVID-19 and is prepared to lower interest rates to stimulate growth when such a move is warranted.
What should you do now?
Most importantly, don’t panic about the possible impact of coronavirus disease on your portfolio. Keep the long-term in mind. Stocks offer higher expected returns precisely because they are risky. For the past 11 years, stock market volatility has been very low and risks have been less obvious. Yesterday morning, we were reminded of these inherent risks. Remember that the attractive historic returns on stocks include many difficult timeframes, including world wars, recessions and depressions, high inflation, epidemics, terrorist attacks, and corporate scandals.
Also, as interest rates have declined in the last few days, mortgage rates have dropped significantly, too. If you have a mortgage with an interest rate of 4% or higher, you may want to call your lender or mortgage broker to see if it makes sense to refinance.
What will we do?
We will continue monitoring the global economic situation and keep you informed of our observations and insights. We will also look for opportunities to rebalance our client’s portfolios (which will probably mean selling bonds and buying stocks at lower prices) and harvest losses for tax purposes.
Please do not hesitate to contact your wealth advisor if you’d like to discuss your portfolio or overall financial situation.