Making Sense of the Coronavirus Market Selloff
The stock market experienced a rough start to the last week of February as stocks fell sharply on Monday and Tuesday. Major indices fell roughly 6%, and the Dow Jones Industrial Average experienced its worst two-day point drop ever. Before looking into what the recent dip was all about, it’s important to remember two things:
We are past due for a market correction
This is normal
So, what really led to the recent market selloff?
The Virus, Itself
As of late-February, the coronavirus has infected 81,000 people in nearly 40 countries resulting in 2,760 deaths. The recent and dramatic uptick of cases in Italy, South Korea, Japan and Iran solidified the global spread of the virus. The World Health Organization stopped short of calling coronavirus a pandemic, but they did warn that countries should be “in a phase of preparedness.”
Additionally, the U.S. Centers for Disease Control and Prevention (CDC) warned Americans to prepare for the spread of the virus in the U.S. and stated it’s not a matter of “if” the virus will become widespread, but rather a matter of “when.” This sent shockwaves to global markets, and U.S. stocks were not immune. The big concern should be for the people impacted directly by the virus and how we can prepare for its potential spread in the U.S.
Impact on Global Supply Chain
The global supply chain, already under pressure from Trump’s trade war, faces further strain from the coronavirus. Fueled by a network of labor, production and trade, an efficient global supply chain relies on the productivity of each country’s speciality. As taught in Econ 101, countries trade stuff that they are good at producing/shipping. If they are not able export the things they are good at producing, they are not able to import as many things that they are not as good at producing. This leads to disruptions in labor, production, trade and profitability.
The coronavirus is already impacting productivity by limiting labor and travel. If people aren’t able to efficiently work and produce goods, that could put a dent in the supply chain. This could also result in an increase in prices since it would become more costly to produce and ship goods globally. An increase in prices could lead to a drop in demand, and demand drives the global economy and stock market.
Corporate Earnings
The spread of coronavirus is also having a direct impact on production and profits of major U.S. companies. Keep in mind, S&P 500 companies (the largest 500 companies in America) generate 30% of their revenue in China and Europe. Needless to say, American corporations rely heavily on production and demand outside of the U.S.
Apple Inc. was the first major American company to say it won’t meet its revenue projections for the current quarter because of the outbreak. It said the epidemic had both limited iPhone production for world-wide sales and curtailed demand for its products in China. A similar message was sent by other major companies including Walmart, Coca-Cola, Nike and General Mills, to name a few. Companies are already experiencing difficulties due to the virus, though it’s uncertain whether these will be short-lived or not.
What Next?
It’s important to take a big step back from the recent market volatility and remember that since the 2008-2009 recession, the U.S. stock market has endured its longest bull run in history. In other words, there has never been a better upswing in the market since 2009-today. These cycles tend to last approximately 8 years. By that measure, we are about three years past due for a market downturn. I’m not saying this is the downturn to end our market upswing, but it certainly would make sense if it was.
Furthermore, keep in mind that despite the 6% drop to start the last week of February, current market levels are similar to those at the end of 2019 a few short months ago. This type of volatility is normal, and it appears that investors have simply priced in the potential impact of the coronavirus in the markets.
Lastly, as it relates to your own portfolio and financial plan, don’t let emotions get the better of you with all the headlines being tossed around. Ask yourself, “Have my financial goals changed as a result of the recent market volatility?” I’m guessing they have not, and if that’s the case, then the best thing you can do, though easier said than done, is to stay the course.
Do you want to confirm that your portfolio is aligned with your financial goals despite recent market volatility? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.