United States

Coronavirus fears drive markets lower

Assessing the recent market selloff

WEEKLY MARKET COMMENTARY  | 

On Monday, February 24, global equity markets sank more than 3% on renewed coronavirus (COVID-19) fears, following reports of a surge in cases in Italy, South Korea and Iran. The S&P 500 Index, which had hit a record high the week before, slumped 3.4%, marking its worst one-day performance since February 2018.

On Tuesday, February 25, Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, said in a news briefing, “It’s not so much of a question of if this will happen anymore, but rather more of a question of exactly when this will happen…We are asking the American public to work with us to prepare, in the expectation that this could be bad.” Following the briefing, equity markets sank further as investors grappled with the potential economic challenges presented by the spreading coronavirus.

Global equities finished the two-day rout more than 6% lower; the S&P 500 Index fell 6.28%, marking its worst two-day slide since August 2015. Amid the heightened market volatility, investors fled to the safety of Treasury bonds, pushing down yields. The 10-year U.S. Treasury finished at 1.328% on February 25, breaking the previous all-time low established in July 2016 following the U.K. vote to leave the European Union. The 30-year U.S. Treasury settled on Tuesday at 1.849%, just slightly above the all-time low it set the day before (source: Bloomberg).

Is the coronavirus the only factor driving recent market volatility?

While the coronavirus is the main culprit behind the recent selloff, other factors have likely also contributed to market volatility: the upcoming 2020 presidential election, elevated equity valuations and the inverted yield curve.

This last factor has given investors additional pause, as an inverted yield curve has historically been a strong predictor of a future recession, with the signal preceding each recession since 1950 with only one false positive during that time. With the precipitous drop in the 10-year Treasury yield, the yield curve is inverted yet again, with the three-month U.S. Treasury (1.53%) now yielding more than the 10-year Treasury (1.33%).

Are the recent market declines unprecedented?

While investors may have been caught off guard by the magnitude of recent declines following a period of relative calm, viewing the pullback in the context of typical drawdowns shows that such declines are to be expected as part of typical equity volatility.

While single-day declines greater than 3% are fairly uncommon, investors should recognize that short term market pullbacks are a normal part of longer-term market cycles. In fact, since 1980, the S&P 500 Index has had an average intra-year decline of 13.8%, with those intra-year drops ranging from 13% to -49%. Despite those intra-year drops, calendar year returns have been positive in 30 out of the last 40 years (source: JPMorgan).

How should investors respond?

Wall Street Journal contributor Morgan Housel once remarked, “All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks.” Such an observation only becomes clear in hindsight. In the midst of heightened market volatility, investors may be tempted to make significant tactical moves out of fear over further market declines.

While market volatility is currently elevated and is likely to remain so, we would caution investors against making broad changes, as such reactive decisions are often ill timed and can impair the effectiveness of a thoughtfully designed investment plan.

We are closely monitoring the still-unfolding situation, though we do not currently find compelling reasons that would justify overriding our asset allocation methodology despite elevated uncertainty. It is important to point out that while equity markets have declined, core fixed income allocations have served their role in portfolios as a risk reducer and diversification against equity volatility. We continue to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to long-term goals, time horizon and capacity for investment risk


Wealth Management Services Disclosure

The sole purpose of this document is to inform, and it is not intended to be an offer or solicitation to purchase or sell any security, or investment or service. Investments mentioned in this document may not be suitable for investors. Before making any investment, each investor should carefully consider the risks associated with the investment and make a determination based on the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.   Information in this document was prepared by DiMeo Schneider & Associates, L.L.C. and although information in this document has been obtained from sources believed to be reliable, RSM US Wealth Management LLC, DiMeo Schneider & Associates, L.L.C. and their respective affiliates do not guarantee its accuracy, completeness or reliability and are not responsible or liable for any direct, indirect or consequential losses from its use. Any such information may be incomplete or condensed and is subject to change without notice. The Frontier EngineerTM and Mission Aligned InvestingTM are registered trademarks of DiMeo Schneider & Associates, L.L.C.

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