|Markets have experienced extreme volatility over the last few days as reports of the coronavirus reported outside of China have increased.|
Every virus outbreak is different, but looking back at other major global outbreaks over the last three decades (SARS, bird flu, swine flu, Zika, etc.), we see that the impact to the U.S. and global economies and stock market has tended to be short-lived. We think the current outbreak has the potential to follow a similar path, although we recognize there is still significant uncertainty. The coronavirus has spread more quickly than SARS, the most comparable outbreak, but the policy response also has been more aggressive, and the survival rate has been higher.
To put this recent market decline into perspective, even in positive years for stocks, the S&P 500 historically has experienced an average peak-to-trough intra-year decline of about 11%. In other words, the S&P 500 has risen and fallen an average of 11% within the year in most years. This latest pullback that we’re experiencing has reached 8%, and it is still well within the normal range of market volatility. On average, the S&P 500 has experienced three to four pullbacks of around 5–10% per year.
It’s also important to remember that the global economy had started to see a pickup in momentum in late 2019/early 2020, before the outbreak. Leading indicators of economic activity were pointing higher. Purchasing managers’ surveys for the United States and Europe had improved. And corporate America delivered solid better-than-expected fourth quarter 2019 earnings results, with many companies saying good things about their 2020 outlooks.
We see the coronavirus as a delay in—not an end to—the global economic acceleration story that has been unfolding since December’s U.S.-China trade deal. That momentum has put the global economy and corporations in better positions to weather the coronavirus storm. We believe we will see global economic impact from the coronavirus over the next several months, but we believe investing fundamentals make the case for a rebound in the second half of this year, potentially with some help from government stimulus.
As difficult as it may be to stay the course in the face of recent market volatility, we would suggest that long-term investors consider that approach. Based on history and our belief in solid investing fundamentals, we look for a return to pre-outbreak levels of global economic growth and corporate profits within the next several months—which we think may continue to power the current bull market and economic expansion through 2020 and possibly beyond.
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Wealth Management Midwest