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.
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