Stocks Sell Off Sharply on Coronavirus Concerns
After hitting record highs, stocks sold off sharply in late February when it became increasingly apparent the coronavirus would spread throughout the world. One implication is that government and personal preventative measures will negatively impact supply chains and diminish global economic growth. The full extent of economic damage is impossible to predict but some form of slowdown over at least the next couple of quarters should be expected.
What’s the Outlook?
There are some causes for optimism amidst all the scary headlines. Growth in new virus cases continues to decline in China. While China’s response to the outbreak will likely prove heavy-handed relative to other nations, the decline suggests the outbreak could follow similar historical patterns of peaking after only a few months. Another potential positive is the makeup of the U.S. economy, which is now over 80% service based. The U.S. is not immune from a slowdown, but the impact could be less severe relative to manufacturing focused economies like China’s. Lastly, the crisis has already led to more accommodative monetary and fiscal policy in the U.S. and abroad.
In times of euphoria or panic, stocks tend to overshoot in both directions, which is why a stable approach with periodic rebalancing helps. There is no way to know where or when this sell-off will find a bottom. Markets rebounded modestly in early March, but it’s too soon to tell if these gains will persist or if there is more downside to come. It may seem obvious that stocks will decline in the event gatherings, school, or travel are restricted in the U.S. However, thinking globally, these are already reality. Actions of this type in the U.S. could occur even at the same time as we begin to gain visibility toward an environment of reduced virus fears later in the year.
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