Did the market catch a virus?

February 28, 2020

What a week it has been for equity markets.  The S&P 500 is down 12% from its recent all-time high.  While the speed of this drop is unnerving, the magnitude is not unusual. Since 1950, the average peak-to-trough drop for the index is roughly 10%, with the worst eclipsing 56%.  All of these declines ultimately recovered to reach new highs.

 

 

 

Merely seven days ago, the S&P 500 was trading at a richly valued 19x forward earnings. The market seemed unflappable, shrugging off any bad news as it continued its march upward.  And while the market has seemed ripe for a pullback, the factor that tipped the scales was the rapid spread of the Wuhan Coronavirus, COVID-19.  The virus has reached nearly 40 countries across Asia, the Middle East, Europe and now the United States.

 

It is reasonable to assume that the number of cases will continue to increase around the world as countries grapple with diagnosing and quarantining the virus and ultimately developing effective therapies and vaccines to treat it.  This uncertainty makes it difficult to determine the impact on global economic growth and corporate earnings. This week, Microsoft (MSFT) issued a statement saying the company will not meet previously issued earnings guidance, joining the likes of Apple (AAPL), Carnival (CCL), Expedia (EXPE), Marriott (MAR) and others that have lowered earnings expectations. Most companies, however, remain reluctant to revise down earnings without a clearer picture of what the virus’s true impact could be.

 

What has become clear is that global economic growth will stall in the short term from disruptions in global supply chains, travel restrictions, mandatory quarantines, and a slowdown in consumer and business spending.  Heightened uncertainty on Main Street leads to volatility on Wall Street, usually to the downside.  Fear is a powerful motivator and will likely lead many investors to overreact. This should lead to attractive long-term investment opportunities for disciplined value investors.

 

Furthermore, the U.S. economy faces this new threat on solid footing.  Employment is strong, inflation is tame, fiscal policy is accommodative and the Federal Reserve is keeping interest rates low. While certainly a concerning development, we do not believe the Coronavirus will fundamentally alter the economy in the long run.

 

We will continue to watch the markets and closely monitor your accounts.  We welcome the opportunity to speak with you, especially in times of volatility, so please do not hesitate to call.

 

 

 

 

 

Disclosures:

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Alpha Omega Wealth Management, LLC (“Alpha Omega”), or any non-investment related content, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Alpha Omega is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from Alpha Omega. Please remember that it remains your responsibility to advise Alpha Omega, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.aowealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.

 

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