The stock market’s decline this week has been both rapid and troubling for investors. The S&P 500 Index closed at an all-time high on Wednesday February 19th, just over a week ago. Since then, the market has experienced the quickest 10% correction in history. The S&P 500 now stands down 8.5% year-to-date through Friday. However, the good news is the S&P 500 is still up 6.1% over the past twelve months.
Stock market corrections typically recover in about four months, according to Goldman Sachs, assuming they are not part of an economic recession or larger bear market decline. Furthermore, over the past 20 years, according to a study by JP Morgan, six of the ten best stock market days fell within a two-week period of the ten worst market days. Therefore, we believe staying patient and keeping a long-term perspective is still the appropriate reaction to the current market. We noted the following study in our Fourth Quarter 2019 Review & Outlook:
“According to a study by Putnam investments, an investor who stayed fully invested in the S&P 500 over the 15-year period ending 12/31/18 would have experienced a 7.77% annualized total return. However, if that same investor missed just the 10 best days in the market over that period, the annualized return would have dropped to 2.96%. That type of return is more in line with what an investor might expect from bond investing, not stock market investing. Furthermore, if the unfortunate investor had missed the 20 best days, the effective return over the period would have been zero.”
The coronavirus outbreak was first reported on December 31st in Wuhan, China. Initially there was little market reaction to the news. The first World Health Organization (WHO) daily situation report was published three weeks later on January 21st. The initial report noted 282 confirmed cases of the coronavirus in four countries, with almost all of those cases in China. The stock market continued to show little reaction to the growing number of reported cases, as confirmed by the all-time high reached on February 19th. However, over the past five-week period the total confirmed cases has grown to over 80,000 across 48 countries. The most concerning aspect of the virus is the human cost. We hope and trust medical scientists can develop both effective treatments and a vaccine as quickly as possible to combat the virus.
A natural reaction to a transmittable virus is for individuals to avoid travel and congested areas, and for organizations to restrict people from travel to crowded areas. This type of reaction will naturally cause the economy to slow down in the near term. For example, if employees in China are not allowed to report for work in large manufacturing facilities, the inventory of Apple products available for sale worldwide can be significantly reduced. The longer this persists the more meaningful impact it can have on Apple’s sales, which directly impact its earnings and share price. There are many other companies such as Disney (theme parks), Starbucks (coffee shops), and Visa (credit card transactions), to name a few, that will likely have their near-term earnings negatively affected by the sudden slowdown in global commerce.
It is not possible to project how long this global health threat may persist. It’s also impossible to predict with precision the amount of economic damage that will occur. A primary financial metric used by analysts for stocks is projected earnings per share. Investors then apply a multiple to those earnings to arrive at an implied stock price. Currently the global reaction to the coronavirus outbreak is causing great uncertainty to the “earnings” number in that equation. During times like this the market tends to discount its worst fears in terms of revising earnings projections lower which causes an abrupt and sharp decline in stock prices.
Despite how bleak and concerning the current outlook seems, we are confident this crisis will pass, like past health scares such as SARS (2002-2003), Avian Flu (2006), Swine Flu (2009), and Zika Virus (2015-2016). Once the coronavirus runs its course there is a good likelihood of stock prices moving higher again due to a resumption of normal economic growth. As famed mutual manager Peter Lynch reminds us, “the secret to making money in stocks is not to get scared out of them.”
For investors who are taking withdrawals from their portfolio to cover living expenses, bad market periods such as this one is why we encourage an appropriate amount of fixed income investments to cover distributions. On the contrary, for investors earlier in their saving years, its times like these that provide a good opportunity to add to quality equity investments. The selloff in the markets this week has resulted in lower mortgage rates. Therefore, this may be a good time to consider refinancing depending upon your current mortgage rate and terms.
Please give us a call if you would like to discuss your situation.
Sincerely,
Marietta Wealth Management, LLC