News & Events
Market Update: The Investment Implications of the Coronavirus
March 10, 2020
Though we typically reserve our market commentary for the quarter’s end, current global events and the market’s response to these warrant a more immediate update.
While it seems like ancient history, the S&P 500 closed at its all-time high just 18 days ago on February 19th, 2020 at a level of 3,386. Since that time concerns over the spread of the coronavirus and its impact on global economic activity have increasingly troubled investors, reaching what felt like the start of a panic stage yesterday following the collapse of the price of oil over this past weekend (more on that in a minute).
Since reaching its high, the S&P 500 is now down close to 20%, technically entering us into a bear market. Investors and the financial media have, predictably, worked themselves into a frenzy, exacerbating the declines. This self-fulfilling exercise is not uncommon; in fact, this is exactly what markets do when faced with an exogenous threat.
To put this in perspective, let’s look at the chart below, which shows the S&P 500’s annual maximum drawdown by year going back to 1928. Over the entire history of the index, the average maximum drawdown from an intra-year high is 13.05%. It’s plain to see, equity markets are volatile! What has been unusual over this 11 year bull market is its absence of volatility. Obviously, the extreme market response to the events of 1928/29 and 2008 stick out in the chart, but a decline of close to 20% is more common than most people realize – 2001 Internet boom/bust, 1987 Black Monday crash, Early 1970’s oil embargo and hyper-inflation.
This type of event occurs once a decade or so, and it’s common behavior for the stock market. It is important to remember that the market is a discounting mechanism for predicting the future. Built in to the price of stocks is an expectation of what companies are going to earn next quarter or next year, or sometimes much further into the future. So when we are faced with a significant (yet temporary) unknown, the market seems to lose all bearings and is set adrift. When you can’t predict what is going to happen tomorrow, much less next quarter, the markets then expect the worst.
Getting back to the price of oil; after a prolonged standoff with Russia, the Saudis made a decision to drastically cut their price on crude oil and flood the market by dramatically increasing production. The result was a free-fall in the price of oil and this (forgive the pun) added fuel to the fire. Bond yields are even further pressured as investors around the world flock to safe havens such as the US Treasuries and certain currencies like the Yen. With confidence lost, the equity markets had nowhere to go but lower yesterday.
So what does it all mean and where do we go from here?
It is said that the best remedy for low oil prices is low oil prices. Think of cheap gas as a tax break for the US consumer. Consider also that the Fed has already cut interest rates by half a percent or 50 basis points, and may take further action at the next scheduled meeting, along with the expectation that the administration will introduce a major stimulus package aimed at supporting small businesses through this period, and one could draw the conclusion that we will see our way through to a period of stabilization.
Time is the investor’s friend. We don’t know how long this will last, or how deep it might run. The totality of the economic impact this virus will have is unpredictable and its spread may have lasting implications. But we are confident that this will pass and in the interim may lead us to some extraordinary opportunities. Warren Buffett once said that “someone is sitting in the shade today because someone planted a tree a long time ago.” Investing takes time and patience to bear fruit. Equity returns are inherently volatile, especially when measured in any given one-year period. But the longer your time horizon, the more predictable the outcome. The below chart illustrates this point.
Comparing the current situation to past events that lead to market extremes is very difficult as the circumstances surrounding each situation are never quite the same. But what is always the same is investor behavior. The hysteria we see now will succumb to reason as more information becomes available and we learn to deal with and manage this new reality. A return to fundamental analysis will lead to the identification of new opportunities. It is for this reason that we believe the heightened volatility underscores our fundamental view that one must remain, above all else, disciplined.
Lastly, we want to note that all of us at YorkBridge are concerned about the spread of the coronavirus and the health and wellness of our co-workers and our clients and their families. Our number one priority is everyone’s safety so we have established a detailed business continuity plan to ensure uninterrupted service and oversight of your portfolios in the event that any of our team members must work from home.
We thank you, as always, for the opportunity to be of service to you and please do not hesitate to call us to speak further about the current market environment and how it may impact you.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1904 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.