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Coronavirus (COVID-19) Injects Confusion into Stock Market

February 24, 2020
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Monday Morning QB - Market Observations:

  • Coronavirus Gets a Makeover – Now Known as COVID-19
  • Stocks Finish the Week Lower as Coronavirus Fears Continue to Spread
  • Fed Chairman Powell Testifies to Congress that the U.S. Economy is Strong, but Coronavirus Concerns are Top of Mind
  • Market Pundits React to Chairman Powell by Raising Expectations for More Interest Rate Cuts this Summer
  • Economic Reports Continue to Validate Stock Market Prices, but COVID-19 Fears are Trying to Infect the Market
  • Coronavirus Fears Set to Scare the Stock Market to Start off the Week

Monday Morning QB - Market Performance:

Stocks ended the week lower as worries grew about the impact of the coronavirus outbreak on the global economy.

The S&P 500 index and the technology-heavy NASDAQ Composite reached record highs this week before falling back, but it was the smaller-cap benchmarks that held up best this week.

The Dow Jones Industrial Average gave up 405 points to finish the week at 28,992, a decline of -1.4%. The NASDAQ Composite retreated -1.6%, while the S&P 500 finished down -1.3%. The small-cap Russell 2000 and mid-cap S&P 400 indexes retreated -0.5% and -0.6%, respectively.

Developed international markets were not immune, retreating -1.4% last week while emerging markets ended down -2.1%.

Coronavirus Earns an Official Name – COVID-19

The latest COVID-19 data (2/23/20) from Johns Hopkins University, which has been monitoring the situation closely, shows 78,990 confirmed cases worldwide, with 2,469 deaths.

An under-appreciated facet of this virus is the stunningly high rate of transmission, as illustrated by the nearly vertical line on the chart below. The extremely high velocity of transmission from person to person is perhaps the most frightening characteristic of this new killer. (Chart from Reuters.)

The question for investors to come to grips with-

What is the virus's effect on a more globalized economy compared to the early 2000s when SARS occurred?

The Federal Reserve is Monitoring COVID-19 Closely and Will Take Appropriate Actions

Federal Reserve officials remained upbeat about the economic outlook for the remainder of the year, according to meeting minutes released this week.

Officials expressed concerns about the threat of the coronavirus outbreak in China and rising tensions in the Middle East.

Fed Chairman Jerome Powell told Congress last week that the Federal Reserve central bank was “carefully monitoring” COVID-19, the deadly virus that is hampering the production of goods in China, especially those for U.S. technology firms.

Stocks Near Record Highs, Bonds Rallying from Declining Interest Rates and the Price of Gold Surging to a 7-Year High – Can Stocks, Bonds, and Commodities ALL Keeping Going Up at the Same Time?

The middle of last week saw record high stock market prices before giving way to COVID-19 concerns by the end of the week. Last week finished with a flight to safety as investors closed out the week buying government bonds and gold.

This Dr. Jekyll and Mr. Hyde market will start the week off lower as news reports suggest COVID-19 is working toward pandemic status.

Investors are wrestling with how much the virus will dent future economic growth.

The "keep buying the stock market" camp pushed the market last week to record highs on the assumption that COVID-19 would be a temporary issue and were more focused on the positive data surrounding the U.S. economy.

The rise in bond and gold prices show other investors are running for the stock market exits and buying safe haven assets to ride out the volatility caused by COVID-19 reports.

I think my favorite observation to date is Utilities and Technology are the top-performing U.S. stock market sectors. These two sectors typically move in opposite directions.

Utilities are considered the safest stock market sector and usually increase when investors are uneasy. Technology, the most aggressive sector, typically increases when stock market confidence is high, and investors are feeling aggressive.

Why Such Market Confusion?

So far, few economists have been willing to call the end of the current bull market cycle. After all, the health of a decade long stock market run is at stake, and fear of missing out has been one of the prominent stock market drivers.

At the same time, investors have the worst December since the Great Depression in their short-term memories. It was only a little more than a year ago that the Grinch stole Christmas. Investors are not willing to wait around for a December 2018 rerun.

Last week, we discussed “cautious optimism”. There are options between all in and all out.

No one can know how this will end. Returns are a scorecard only to be determined after the dust settles. Risk, however, is under your control, and each person should adjust their portfolio accordingly.

So, until the investor herd decides definitively what direction this market is going, do not be surprised by heightened volatility.

Market volatility, the up and down swings in stock prices, is the cost of long-term growth. In general, volatility is a good thing!

However, dealing with volatility is a personal decision and should not be dismissed with a thoughtless “Stay the course" response.

Take note of the response above from Fed Chairman Powell – monitor the situation closely and have a plan.

With the stock market still near all time highs, now is a good time to evaluate your situation if you have not done so already.

How much can you afford to lose?

Determine what an acceptable loss is and make a game plan for your portfolio.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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