Our Take on the Continued Coronavirus Volatility
In the span of weeks, the coronavirus went from something an ocean away to tangibly impacting life here at home. The WHO declared the coronavirus outbreak a pandemic as cases are rising in the United States and abroad. That’s pushed governments to implement “social distancing” policies that discourage large groups of people from gathering. Limiting opportunities for exposure in groups has been shown to slow the rise of new cases, which helps healthcare workers keep pace and provide care.
Cruise lines have suspended operations, professional sports leagues, performances, and anything else that could draw a crowd are being canceled or postponed. People are being encouraged, or required, to stay home. Without a doubt, there will be significant, short-term impacts to the economy and the data that trickles out in the weeks ahead. There is a lot of uncertainty and viruses are very unpredictable.
At times like this, it can feel like fear and uncertainty are here to stay. But, if history is any guide, this uncertainty will eventually pass.
JUST A FEW WEEKS AGO
January and February seem like a long time ago, but way back then the economy was re-strengthening. This might seem irrelevant now amid a whirlwind of coronavirus updates, but it’s important. Much like the virus, if you’re strong and healthy before you get sick, you have a better chance of a strong recovery.
Two major cogs of economic growth — consumers and banks — were and remain in good shape. The consumer savings rate remains high and the cost of the debt is cheap. Stimulus from rate cuts is trickling through the economy, particularly in the housing market. The banking system is also in a stronger position than it was in 2008. Since the financial crisis, banks have been regularly stress tested by the Federal Reserve to endure conditions far worse than today.
In fact, data into February, including a strong jobs report and non-manufacturing PMI indicated the economy was strong and on track for future growth. The economy’s health prior to all this could help it ward off the worst impacts of coronavirus today.
LOOKING TO PANICS OF THE PAST
Sentiment is incredibly low right now. People, particularly investors are panicked. But we’ve been to this “peak uncertainty” many times in the not-so-distant past, and in most cases the big questions that drove market fears were eventually resolved. It just took some time.
During Financial Crisis in 2008, markets reached peak uncertainty because the very survival of the financial system was in question. At the time, no one knew what the fix would be — or if there even was a fix. There was no foreseeable end date for that uncertainty. But markets recovered and we returned to economic growth in the years that followed.
During the 2001 bear market, no one knew how the terrorist attack on 9/11 would affect business, the economy, and people. What threats would we need to prepare for next? Terrorism was the big uncertainty with no foreseeable end date. Still, markets recovered, and we returned to economic growth in the months and years that followed.
Today, the uncertainty is coronavirus. But unlike the past two bear markets, there is a more discernible end date for this crisis based on the experience of past virus outbreaks and medical forecasts. And when that happens, we expect the markets to recover and return to economic growth, just as has happened in the past.
These past few days are reminiscent of 2008 when the first financial rescue package was voted down by Congress. Markets fell sharply that day as confidence in lawmakers wavered. That likely got their attention, because the next day it passed. Today, we believe some of this week’s market declines have been driven by the lack of clarity on the policy front. Markets are looking for a plan and a path forward. Like 2008, we expect a response with more teeth and details will be forthcoming soon from the Federal Reserve and Congress. The good news is that central banks and policymakers have a blueprint for how to inject capital into the system as they did over a decade ago.
Lastly, I'd advise investors not to draw conclusions about what the future holds based upon daily market moves. I believe the market is less of a leading indicator than what it used to be. When I started in the business, most investors traded based upon intermediate- to long-term outlooks. Contrast that with today where many investors (and computers) trade based upon their outlook for the next 15 minutes to one day. Quite simply, many investors now to try out-react each other based upon the latest headline. I believe this creates opportunities for long-term, steady investors who can look past tomorrow. Investors who have patience will be rewarded over time.
Despite coronavirus angst in markets, our answer to how we deal with this, how we invest money, how we plan remains unchanged: Tune out today’s market noise and stay steady.
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. All investments carry some risk, including loss of principal invested. No strategy can guarantee a profit or protection against loss. To learn more, click here.
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