Daily Capital

Weekly Market Digest: Coronavirus and Market Correction Update

Coronavirus fear gripped markets, sending stocks rapidly into correction territory. A more detailed summary of our view is below. In other news, Bernie Sanders strengthened his status as front-runner for the Democratic nomination following an adequate debate performance.

Weekly Returns:

S&P 500: 2,954 (-11.5%)
FTSE All-World ex-US (VEU): (-8.1%)
US 10 Year Treasury Yield: 1.17% (-0.29)
Gold: $1,580 (-3.8%)
EUR/USD: $1.103 (+1.7%)

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Major Events

  • Monday – Drug maker Moderna shipped a batch of coronavirus vaccine to the government for testing. Clinical trial results could be available by summertime.
  • Tuesday – The ten-year Treasury yield hit a record low of 1.32%.
  • Tuesday – Bernie Sanders appeared to strengthen his front-runner position after a primary debate.
  • Tuesday – China took the first steps to implement the phase one trade deal, lifting import restrictions on US farm goods.
  • Tuesday – The CDC said it expects a wider spread of coronavirus in the US and warned of potential disruption to daily life.
  • Wednesday – President Trump conducted a press conference and downplayed the risk of coronavirus.
  • Thursday – The S&P 500 fell 4.4%, pushing stocks into correction territory.
  • Friday – Fed Chair Jerome Powell said the central bank is prepared to cut interest rates if necessary to sustain growth if the coronavirus causes significant disruption.

Our Take

Market Summary

Markets declined sharply this week as it became more apparent the coronavirus is likely to spread throughout the world, potentially causing significant but likely temporary disruptions to daily life. Very importantly, however, the number of reported active cases in China has been steadily declining for about a week now, with official numbers down about 25% from the peak.

This is consistent with similar outbreaks and provides strong reason for optimism this coronavirus will follow a pattern of peaking within a few months of initial spread in any given area. The trend may temporarily reverse as restrictions are lifted but would be incredibly good news if it persists next month. To date, the reported infection rate in China overall has been 0.006% of the total population.

The correction in stocks has been swift, the fastest ever 10% decline from a record high. US stocks are now back at levels seen about five months ago. Meanwhile, global stock prices are modestly lower than two years ago. Diversified Personal Capital managed portfolios are generally up over this same two year time period due to dividends as well as gains in bonds and alternatives.

All of this is relevant because once panic subsides and damage is assessed, fundamentals will again matter. Global stocks have an expected forward Price to Earnings of about 15 and a dividend yield of a little over 2.5%. Given all-time low Treasury rates, stocks are expected to remain attractive on an earnings yield basis, which is encouraging deep in a bull market.

Perspective

In times of euphoria or panic, stocks tend to overshoot in both directions, which is why a stable approach with periodic rebalancing can help. There is no way to know where or when this sell-off will find a bottom. It may seem hard to imagine, but there is also short-term upside potential as well as further downside potential. It can feel obvious that stocks will decline if restrictions are placed on gatherings, school or travel. Thinking globally, this is already reality. If we get to that point in the U.S., it could be concurrent with a decline in transmission and new cases like we’re starting to see in China.

We understand it is difficult to think long-term in the face of rapid declines, especially with simultaneous concern about safety and our loved ones. Our job as advisors is to remain unemotional and strive to do the right thing to help our clients achieve their financial goals. Generally, that means striving to identify an appropriate long-term allocation, being disciplined about doing the little things that add value along the way and communicating with you directly. Deviating from a disciplined approach can open the window for mistakes and poor results.

Portfolio Actions

As always, if we see a situation where we have a strong conviction that the fundamental risk/reward of a security or asset allocation no longer makes sense, we will consider alternatives and act accordingly. Currently, this is not the case. We will look to capture tax loss harvesting opportunities in taxable accounts where they are available. There may also be some rebalancing of accounts, but these will be relatively minor as current allocation overall remains reasonably close to strategic targets.

Please be in contact if you wish to discuss our views on current events, or anything in your financial life. We wish you a great weekend.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk, CFP®
Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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