After an initial rise and pullback in January due to Coronavirus fears, U.S. stocks followed a similar but more exaggerated path during February. First surging almost 5% to new all-time highs, U.S. stocks fell precipitously based on renewed Coronavirus concerns, ending the month down 8%. The U.S. stock market has now fallen 13% from its recent mid-February peak, putting it officially into correction territory. For context, the overall U.S. stock market is back to where it was in October of last year, and still up 3% compared to six months ago.
We understand our clients are thinking about the COVID-19 virus, and are likely concerned for their health and that of others. Even though we cultivate a long-term perspective on investments grounded in clients’ individual goals and concerns, we are aware that headlines can be troubling. When headlines are troubling, we are in favor of holding current events in perspective.
Corrections are a normal part of the market’s cycle. Since World War II, the U.S. stock market has experienced a correction of 10% or more roughly once per year. We also know that the stock market responds to epidemics. Of the 12 epidemics to occur in the last 39 years, the markets usually showed a decline one month following the first occurrence of the disease. But markets are resilient. Six months after the first occurrence of each disease, the U.S. market was positive 91% of the time.
While it is still too difficult to estimate the economic consequences of the COVID-19 outbreak in the U.S., countries with stable economies and developed health care systems are better positioned to manage the virus. Regarding the U.S. economy, the Federal Reserve Board’s Vice-Chair, Richard H. Clarida, commented on February 25th that, “the U.S. economy is in a good place” and, “it is still too soon to even speculate about either the size or the persistence of [the coronavirus] effects, or whether they will lead to a material change in the outlook.” That same day, addressing the possibility of a recession, former Federal Reserve Chair Janet Yellen also commented on the virus, stating, “we had a pretty solid outlook before [the coronavirus] happened – and there is some risk, but basically I think the U.S. outlook looks pretty good.”
In a recent CNBC interview, Warren Buffett was asked to comment on the virus and U.S. stocks. His response: “The real question is: ‘Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’” Warren didn’t think so and nor do we. It’s a good reminder that, for investors, patience is a virtue.
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