We have been saying for quite a while, long before the coronavirus began spreading around the world, that the market was overvalued and due for a pull-back. The coronavirus is not the only cause for the market declines, but it certainly has added to the turmoil.
You may have heard about the clash between Russia and Saudi Arabia on oil price strategy. In short, they are in a battle for market share, and their price war has had a serious, negative effect on the U.S. oil industry. This has been a driver of market movement the last few days as well.
As for the coronavirus, we believe that we should keep in mind that before the spreading virus took over the headlines, the U.S. economy was looking good. Consumer spending was healthy. We had a good jobs report. The stock market reached a new all-time high on February 19, and the trade war between the United States and China was easing.
The coronavirus will almost certainly result in lowered earnings forecasts and slower growth, but it reasonable to think there is a good chance that the overall conditions that existed before the outbreak will also exist once the virus’ spread has been contained. In fact, the supply with China has already begun to show signs of improvement.
How to respond
In the midst of a steadily worsening situation that also comes with a lot of uncertainty, it is human nature to play out the worst-case scenario and think that will be the outcome. History, though, tells us that in the age of modern medicine, this is rarely true with regard to viral outbreaks and epidemics.
As for how this relates to markets, in the vast majority of these situations, short-term drops and volatility are followed by a return to conditions similar to before and long-term appreciation.
Trying to time the market almost always leads to big mistakes. The market’s best days often come soon after the worst days, so trying to figure out when to get in and out leaves you highly vulnerable to selling as a rally is taking off or buying right before another dive.
On Monday, President Trump said that plans for tax cuts and other economic relief were being worked on. We do not yet know the details, but among the things being talked about are a payroll tax cut that could extend through the end of the year, providing assistance to the airline and cruise ship industries, helping small-medium size businesses, and doing something for workers who lack paid sick leave. The president and Congress will have to work together to sort out exactly what this will look like.
Lower interest rates and stimulus plans won’t stop this crisis or keep us from worrying about its effect on the economy. But they can provide support to the economy in the meantime.
The good news
The good news is that an $8.3 billion emergency funding package is in place that includes funding for prevention and preparedness, plus the development of vaccines. Also, while preventive measures are of utmost importance and more disruption is likely ahead, both in the markets and in our everyday lives, the situation in China is improving, the world scientific community is on it, and most people who contract the virus recover.
What are we doing
We are keeping a close eye on every client’s holdings and using the volatility as an opportunity to harvest losses in taxable accounts and rebalance portfolios. We are also always available to discuss your concerns and shed whatever light we can on what is happening in the markets.
Meanwhile, we sincerely wish you all good health and look forward to the day this crisis will be behind us.