As financial markets react to the global spread of the COVID-19 virus, anxiety levels increase.
Investors are rightfully worried about the virus, as the global economy had already been rattled by the 2-year U.S.-China trade war, as well as the recent oil price war between Saudi Arabia and Russia.
Social distancing is having a clear and direct impact on both the supply and demand sides of the global economy.
Let’s explore the impact of the Coronavirus outbreak on financial markets and investments.
What You Need to Know about COVID-19 and Financial Markets
Potential travel limits, factory closings, and school closures impact the supply side. Fewer trips to malls, restaurants, and sporting events impact the demand side and result in lower consumer spending. Sharp stock market drops also contribute to lower consumer demand as household wealth is impacted.
The stock market is a forward-looking mechanism. In other words, investors buy stocks in anticipation of what the economy and corporate earnings will look like in the future. With COVID-19 going to have an impact, stocks have suffered sharp losses. It remains too early to see the full effect that it will have on the economy and how businesses will react to it.
Looking forward, have we seen the end of this market selloff? No one knows the answer to this question, and it is a very fluid situation. We do believe that more stock market weakness is possible. Companies will get a clearer view of the impact of the virus and start to reduce their outlooks. As businesses reduce their sales and profits expectations, stock prices could follow lower.
While there is a clear risk to stocks in the near-term, we do see some reasons for optimism.
The U.S. consumer, housing, and services market was healthy before this pandemic began. Also, the combination of the severe drop in oil prices caused by the price war between Saudi Arabia and Russia. A sharp drop in interest rates should be beneficial to us as consumers.
When some normalcy returns to the U.S. after the virus dissipates, as it has done in China and South Korea, $30 oil prices and near-zero interest rates are essentially a tax cut for the American consumer.
Lastly and most importantly, similar to what other nations have done, we have seen some economic stimulus out of Washington that has improved investor optimism.
So far, the government has enacted some measures that include giving the Small Business Administration authority to issue loans to small businesses affected by the virus. The Treasury Department will defer tax payment, without interest or penalties, to certain affected individuals and businesses.
Also, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law at the end of March.
Watch Your Investments During COVID-19
From an economic perspective, global central banks, including the People’s Bank of China and the Bank of Korea, have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically, the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap.
Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape. We do expect market uncertainty to continue, but the downside may be limited.
We also think the impact on markets will vary by sector. Sectors related to travel, such as cruise lines, airlines, and hotels are already taking a hit. Online entertainment companies and streaming services are performing better.
This current market volatility will remain with us for the foreseeable future.
We are focusing on potential actions in two areas – what is being done to reduce the spread of COVID-19 and what fiscal stimulus measures are being enacted to reduce the economic uncertainty caused by it.
Since we cannot predict when, or if, these will occur, it highlights an important and time-tested strategy that you should follow – a diversified and well-balanced investment portfolio can help mitigate the difficult market days.
This is an extremely volatile market, and being diversified is very important by not having too much risk exposure to one asset class or security.
What Should You Focus On Now?
Focusing on long-term risk and return objectives is important as we want to help you stay on course and focus on the things you can control in your portfolio.
In times like these, I hear from some clients that they can find it difficult to stay committed to an investment program when fears are high.
But for me, a quick look at recent history helps me keep tumultuous seasons in perspective.
Remember when the trade dispute with China ramped up back in February 2018? In just six trading days, stock prices had undergone a roller coaster ride on their way to a 10-percent market correction.
On February 8, 2018, CNBC reported that the Dow Industrials traveled 22,000-plus points over February’s first full week of trading, due to trade-related fears.2
How about the 4th quarter of 2018?
On October 10 of that year, the Dow saw an 800-point drop, largely due to rising interest rates and global economic concerns. And who can forget the holiday market trading two months later?
It was a breathtaking event as the Dow lost over 600 points on Christmas Eve, then soared 1,000 points the day after Christmas.3,4
In the past few weeks, I’ll admit that I’ve done a few “double takes” on my computer screen. We’ve watched major swings in stock prices and movements in the bond and crude oil markets.
After climbing to record highs in February, the S&P 500 ended the first quarter down -19.60% (including dividends), which was its worst quarter since the financial crisis.
There is a silver lining, though—it could have been much worse. The index rallied 17.6% in just three days near the end of March on news and hopes for both monetary and fiscal stimulus. This was the strongest three-day rally since 1933.
Unfortunately, the rally was led by defensive sectors like utilities, real estate, and health care. These are not the sectors that typically lead in a bull market.
Uncertainty Remains for Investors
While we welcome the huge stimulus package and the Federal Reserve’s responses to the crisis, there is still a lot of uncertainty remaining.
Investors discounted risk assets like stocks and high-yield bonds for much of this uncertainty already. However, we still won’t have a good gauge on the magnitude and length of the economic downturn until we get a handle on the duration of the social distancing policies.
To get more clarity on that, we must see the spread of COVID-19 slow.
Unfortunately, large stock market fluctuations are likely to persist, and setting our expectations is very important. We are just starting to get a glimpse of the economic data that will be coming. There is no doubt that financial markets will continue to be impacted.
Unemployment numbers will jump. Both manufacturing and service-sector data will fall, but just how much will start to become clearer this quarter.
No doubt it will be horrible, as markets have already priced in a lot of bad news. The important questions are: how bad will it be, and how long will it last?
We do expect that the second quarter will be the low point for the economy. We will start to see a recovery in the second half of the year. There will be many negative economic headlines in the coming weeks. A surge of COVID-19 cases is also widely expected.
As April unfolds, we must remind ourselves that much of what we are witnessing is largely priced into financial markets. In other words, it’s expected.
While the media will undoubtedly and rightfully focus on this news, we must look beyond the current headlines and to the future.
China is showing signs of recovery already. Low-interest rates and stimulus should jump-start the economy when social distancing ends. We should not underestimate the power of these two forces, as we saw the impact these had on markets in 2009. The stimulus package this time around is more than double that of 2008.
Stay Safe and Healthy During COVID-19
We hope that you, your family, and your loved ones are staying safe. We will continue to monitor both news about the virus and the implication of financial markets. If you have any questions whatsoever, please do not hesitate to contact us.
And just like always, I am here to help you and your family, answer any questions that might surface for you. Whatever decisions you’re considering, I’d be honored to support you through them. Reach out to me anytime. And go here so that you don’t miss a blog post.
P.S. Did you enjoy this FFCCU guest blog post? Sign up for our newsletter so that you receive our latest articles!
Nichole M. Coyle
CERTIFIED FINANCIAL PLANNER™
20333 Emerald Pkwy
Cleveland, OH 44135
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.
The views stated in this piece are not necessarily the opinion of the Broker/Dealer and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. A diversified portfolio does not assure a profit or protect against loss in a declining market. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Material produced by Cetera’s marketing Central.
1. CNBC.com, March 12, 2020
2. CNBC.com, February 8, 2018
3. CNBC.com, October 10, 2018
4. CNBC.com, December 25, 2018