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Comment from the CIO: Coronavirus (COVID-19) and Stock Market Volatility

February 27, 2020

The outbreak of Coronavirus Disease 2019 (COVID-19), a new coronavirus originating in the Hubei province of China, has received extensive media coverage by news outlets worldwide. While the vast majority of individuals infected by the virus reside in China, the virus has spread into other countries around the world. At the time of this writing, the virus has infected over 80,000 individuals, including 3,000 residing outside of China—of which over 50 reside in the U.S.

On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency in an effort to aid the nation’s healthcare community in responding the virus.1 The U.S. Centers for Disease Control and Prevention has warned Americans to, “prepare for a coronavirus outbreak at home that could lead to significant disruptions of daily life.”2

Measures taken to slow the virus’s spread, namely travel restrictions and suspension of commerce, have severely impacted the Chinese economy. Many economists believe that first quarter economic contraction is inevitable for China’s economy, while prior expectations called for growth of 5% or more. Other countries, notably Italy and South Korea, are also experiencing meaningful curtailment of economic activity.

Pandemic fears lead to market sell-off

Although the U.S. and world financial markets’ initial reactions to COVID-19 were fairly muted, fears quickly emerged of pandemic and an associated economic disruption, resulting in a significant sell-off of stocks around the world. After peaking on February 12, the popular Dow Jones Industrial Average shed nearly 2,500 points through the market’s close on February 25, with the third largest single day point drop ever on February 24.

The S&P 500 Index lost 7.4% of its value over the course of just four trading days, eclipsing the two peak-to-trough declines between 6% and 7% in 2019, and marking the largest since the major drop in stock prices at the end of 2018.

International stocks have also experienced heavy losses.

Finally, 10-Year U.S. Treasuries also made headlines this week, as rates fell to historic lows. The low rates indicate that Treasuries are in high demand as investors move their assets out of “riskier” equities and into much lower risk bonds, often termed a “flight to safety.” This is unsurprising given the market’s downturn and negative sentiment around COVID-19.

As we have noted before, significant market corrections are normal and investors should expect periodic market retreats. During any given year, on average, stocks fall about 11% from their highest peak to their lowest point.

No one can accurately predict when the markets will reverse course. It could happen while you are reading this letter; it could happen next week, next month, a year from now or sometime further into the future. History has proven that investors who panic by quickly selling their stock holdings often return to the markets too late, and would have been significantly better off had they waited out the downturn. Stock market corrections can be healthy and they present opportunities for long-term investors.

U.S. economy in good shape

Prior to the COVID-19 outbreak, the prospects for another year of modest U.S. economic growth were very good. Most economists expected growth between 2% and 2.5%, a continuation of the longest U.S. economic growth streak in its history. Unemployment rates are at generational lows and high consumer sentiment levels indicate that consumers are optimistic about their own economic prospects. The U.S. and China have temporarily called a truce to their trade war, and manufacturing activity had begun to show signs of improvement in Europe.

Risks certainly exist that health authorities may fail to contain the virus, leading to a more massive outbreak and severe near-term economic disruption. However, we can trust that public officials and central bankers around the world stand ready to respond with a number of economic tools at their disposal. The U.S. and world economies have repeatedly proven resilient after a number of economic setbacks.

Wespath manages through a long-term, disciplined strategy

Wespath adheres to a consistent, long-term and disciplined strategy for managing a diversified investment program. We continue to follow this strategy in both up markets and down markets, and it has successfully stood the test of time. We are confident that our investment approach is prudent and will continue to faithfully serve the retirement needs of our participants and the missions of our institutional investors.

Sincerely,

Dave Zellner
Chief Investment Officer

 

1 Centers for Disease Control and Prevention
2 Bloomberg, February 24, 2020

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