A Note About This Market…

February 24, 2020  |  Michael Reilly

Note to investors

Today is a quintessential “risk off” day.  

It’s a global flight to safety – one that is pushing traditional safe havens like gold and Treasury prices higher, while riskier assets like stocks sell off sharply.

The fear driving markets is that China’s CoronaVirus (COVID-19) could spread outside their borders. And not just spread, but cause a global pandemic. 

But let’s face it, the real concern for the market isn’t the toll on human life, it’s the fear that a full-on pandemic could put a big dent in economies around the globe, disrupting distribution chains, slowing production and ultimately hurting corporate profits – especially of the big multinational companies, like those of the DJIA. 

As of this writing the DOW is down 1000 points and -3%, making it the worst day for the Mega-Cap index in 2 years.

It’s not unreasonable to assume that if large swaths of the global working population is down with the flu, then stuff isn’t getting built, shipped or sold. Makes sense right?

It feels like a classic knee-jerk reaction, but one that is likely to continue to dominate both headlines and price action, at least in the near future.

And I have little doubt the media will do their part to fuel the fires of panic, coming up with creative and sometimes even alarming headlines designed to get you to tune in.

Take this little gem I’m seeing right now:


So my first piece of advice – don’t trade based on headlines!

It seems whenever a new infectious disease makes an appearance, headlines linking the outbreak to market volatility and an impending doom are sure to follow.

Who remembers the bird flu, swine flu, SARS or even Avian flu?

There was plenty of hand wringing and headlines about the possible impact of those outbreaks as well.

Yet historically, markets typically move on pretty quickly from these disease-related pullbacks.

So what does market history tell us we might expect this time?

Well first and foremost, history shows us that even the most severe outbreaks haven’t caused bear markets.

Much like today’s virus, SARS was a coronavirus that emerged in China and caused respiratory infections. 

The World Health Organization estimated its fatality rate at 14% – 15% of all reported infections, with 774 confirmed deaths between November 2002 and 2003. 

And just like today, the media was all over the run on surgical masks as folks rushed to protect themselves. 

But markets are resilient and market participants are always looking for opportunity. In spite of the SARS outbreak of 2003, the S&P 500 managed to return 28.68% (according to Slickcharts).

Moving on to the spring of 2009, stocks were just starting to recover from the financial crisis, when swine flu broke out. 

Again, headlines were sure it would spiral into a deadly global pandemic, derailing the recovery here in the U.S. in the process.

Contrary to all the scary headlines, the impact to markets was muted with a -4.9% S&P 500 drop from May 8th to the 15th (when the fear first hit) and a -7.0% pullback between June 12th and  July 10th. 

By year end (2009), the S&P gained 26.46%. 

These days, breaking news can spread faster than the flu – mostly spreading panic among investors. 

The coronavirus can impact stocks in the near-term, but the likelihood of a structural long-term downturn caused by this virus seems pretty unlikely.

I wrote to you last week that Gold was on the rise (today approaching $1700 an ounce) and that equities had been selling off for weeks. Obviously, today’s sell off hasn’t changed that. We remain in a market showing short term weakness, but long term relative strength. 

We don’t know how long the equity markets will underperform relative to other asset classes. We just know that it is. We will continue to rely on our technical analysis to help navigate these choppy waters.

If you’re interested in more personal investment advice, consider giving us a call at 866.711.2836 Ext 3. We offer completely free portfolio evaluations to investors with portfolios valued at least $500,000. Call today to schedule an appointment with one of our qualified financial advisors.

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