Coronavirus Correction

KCS Wealth (Byline: Ken Waltzer)

February 25, 2020

If you follow the markets—and even if you don’t—you may know that the S&P 500 fell -3.4% today (Feb. 24, 2020). Declines of more than 3% in a single day are uncommon, although the last one was only 6 months ago, on Aug. 5, 2019. Whenever this happens, investors understandably wonder how much more downside lies ahead.

History can provide a guide. Since the coronavirus outbreak first hit the news in January, the stock market has been in a correction mode. In late January (from Jan. 22 through Jan. 31), the S&P 500 fell a modest -3.1% peak to trough, only to rebound to new highs. That was the first leg of the correction (most of which have two legs). This time, the S&P 500 is down -5.3% from its Feb. 19 peak. In the past, the time between the first and last leg of corrections has averaged 4 to 6 weeks, with more recent ones clocking in right around 4 weeks. This would suggest that the current correction may be over in another a week or so. (Note: this is not a forecast, but rather an extrapolation from stock market history.)

Every correction has a trigger; it seems rather obvious that the coronavirus was the culprit this time. But there are always other concerns below the surface. In this case, we think that the democratic primaries, with Bernie Sanders as the frontrunner, have the markets on edge as well. (As you might imagine, a self-proclaimed “socialist” does not go over well with Wall Street, regardless of how Main Street might feel.) This is reflected in the -7.8% drop in UnitedHealth Group, a major health insurer that would suffer if Medicare for All were to pass.

Regardless of your feelings regarding the upcoming US Presidential election, February is way too early for stocks to be fretting about November, which is an eternity away in political time. The coronavirus, however, is a different story. We’re not going into detail here about the public health implications of the virus (though we might in a subsequent eNewsletter), but we do want to mention the economic fallout.

In January, investors appeared to assume that the impact of the virus would be largely confined to China. While it is true that even in that case, disruptions to the global supply chain and broader economy would have still been sizable, it now appears that several other countries are being impacted to a lesser—though still significant—degree. Most worrisome are South Korea, which is tightly embedded in the global technology supply chain, and Italy, which as part of the EU sees over a million people cross its borders each week.

The good news is that the number of new cases in China appears to have peaked and is rapidly declining, from over 4,000 per day on Feb. 4 to 409 on Feb. 24. (We take all numbers out of China with a grain of salt, but we do believe that the trend is correct.) Also, nearly all the recent cases have been in Hubei Province, where the disease originated. Fingers crossed, but China may re-open for business is the next couple of weeks.

South Korea, Italy and other countries are at least a couple of weeks behind China, and though the impact will likely be much less, resolution will take longer. All told, it will likely be late March or early April before we will be able to call coronavirus “contained.”

The impact on the global economy will be substantial (much more than SARS, for example) but likely short lived. Expect to see first quarter GDP figures from many countries well below what was envisioned only a month ago, and several countries could see a contraction (“negative growth”). But worries about a recession (which requires 2 back-to-back quarters of economic contraction) are overblown in our opinion. By the second quarter, people will almost certainly be back to work, back to school and back to traveling. The rebound, both in the economy and the stock market, should be robust and rapid.

One more thing: Regardless of the trigger, big down days rarely spell doom for the markets. The table below shows how equities performed subsequent to Mondays when the S&P 500 dropped at least -2% during this bull market. As you can see, the index is well into positive territory a month later in 94% of cases, suggesting that big down days are more buying opportunities than portents of further declines.

Days like this can make people question their commitment to equities. But that’s exactly what Mr. Market wants—to frighten the timid into selling out so that the pros can make even more money. Don’t give Mr. Market what he wants. Invest like a pro and stay committed to your financial plan.

Yours truly,

The KCS Wealth Investment Management Team

KCS Wealth Advisory is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with personalized financial, estate and tax planning services.

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