COVID-19 Presents a Challenge to the Global Economy

Stock prices have bounced in-and-out of correction territory, as investors attempt to measure the economic impact of the COVID-19 virus. During periods of volatility, it is important to remember that stock market corrections are not unusual and represent a normal part of the investing cycle. A correction is defined as a decline of 10% or greater from a recent high in the financial markets. Corrections can last anywhere from days to months, but few have lasted longer. Recently, we’ve seen a bumpy ride, and I wanted to reach out to give you some context on what this might mean for you.

There’s little doubt the coronavirus presents a challenge to the global economy.  I do not know how much more widespread this virus will become or how many lives it will claim before it is brought under control.  Already, we are seeing a coordinated response from healthcare organizations and federal agencies.  On March 2, 2020, the Federal Reserve cut short-term interest rates by half a point, and the International Monetary Fund and G7 officials pledged to support economies impacted by the outbreak. 

While significant market downturns can certainly be unsettling, it helps to view corrections from a wider perspective.  This is the 7th correction the stock market has seen within the last ten years. You may remember late 2018, when the market benchmarks fell nearly 20% when the Federal Reserve continued to raise shorter-term interest rates as the U.S. economy strengthened.  In fact, if we widen our gaze further, we can see that this is the 27th market correction since World War II.  Past performance can’t predict future market results, but in the past, markets have corrected and have recovered every time moving on to new highs.

Thinking back to epidemics of the past, beginning with SARS in 2003, the Bird Flu in 2005, the Swine Flu of 2009, the Ebola outbreak in 2014 and the mosquito born Zika virus in 2016, the markets recovered in all cases. At the onset of the first crisis SARS in 2003 the S&P was trading at 856. Seventeen years and 5 epidemics later the S&P, as I write this is at 2,806 almost 4 times higher.

Corrections remind us of a reality we don’t like to think about: stock prices do not go up in a straight line.  When prices drop, it can be tempting to give in to our emotions and react, but patience and caution may be warranted. 

Your investment strategy has been created to reflect your time horizon, risk tolerance, and goals. As an investor, getting through a correction means having the poise to ride out short-term volatility.  We will be paying close attention to market developments in the coming days and will make adjustments to portfolios as necessary. In the meantime, feel free to call me or reach out to your advisor if you have any questions or concerns.