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Markets Retreat on Coronavirus Fear

January 27, 2020
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Monday Morning QB - Market Observations:

  • Coronavirus Concerns Take Center Stage with Fifth Case Reported in the U.S. Sunday
  • On Friday, the Second U.S. Reported Case Lead to Worst One Day Market Drop Since October
  • Positive Earnings Reports Swallowed up by Coronavirus Fears
  • Virus Fear Led to a Flight to Safety…Money Flows to Defensive Stocks and Bonds
  • Big Earnings Week Ahead - 4 of the 5 Largest Stocks Report - AAPL, AMZN, FB & MSFT
  • Uncertainties Regarding Coronavirus Impact will be a Drag on the Market Until the Extent of the Epidemic is Clear – the Worst is Likely Yet to Come

Monday Morning QB - Market Performance:

Coronavirus fears sent stock prices lower for the holiday-shortened week.

The large-cap indexes and the technology-heavy NASDAQ Composite index outperformed and touched new record highs before falling back sharply on Friday when reports confirmed the second case in the US.

The Dow Jones Industrial Average fell back 358 points to 28,989—a decline of -1.2%. The NASDAQ fared the best giving up just -0.8%, while the large-cap S&P 500 declined -1.0%.

Smaller cap benchmarks fared the worst. The S&P 400 mid-cap index gave up -1.5%, while the small-cap Russell 2000 declined -2.2%.

Profit-taking Friday - Fears of the Economic Impact of the Coronavirus Rolled the Stock Market

The coronavirus first hit the city of Wuhan, China. Ground zero has seen more than 900 people infected with the disease. The virus has claimed the life of more than 50 people and forced the Chinese government to issue travel bans and quarantine the area in and around Wuhan. Sadly, health officials expect both the number of infected and dead to rise.

As of this writing, there are five reported cases within the U.S. The two reported cases on Friday involved people that had traveled to the infected area of China.

The stock market dropped on Tuesday after the first case was reported and again on Friday with the second reported case. As more infected people are found in the U.S., the stock market drop will likely continue.

Our job in writing the MMQB is discussing the most market relevant facts. Our task is to separate the facts which are significant to the movements (up or down) in your portfolio from the news noise.

We are very sympathetic to the seriousness of any disease's outbreak and the people affected. We all are!

We all can only imagine the worst-case scenarios, which would make the economic setbacks trivial. That is exactly why the stock market dropped last week and will likely drop more in the weeks ahead.

Every health crisis takes on a life of its own. Each of the most recent outbreaks of SARS, flu and other epidemics did not escalate into pandemics thankfully. 

Collectively looking at past outbreaks shows similar market results.The market suffered in the short run but ended as buying opportunities.

Too Early to Know What the Extent of the Epidemic Will Be

When the SARS virus hit China, their initial reaction was to conceal the problem. With the coronavirus, Chinese heath authorities disclosed the cases within days of discovery.

Next, they sequenced the genome of the virus and made it available to researchers around the world.

Hopefully, these actions will lead to a quick resolution with tools to diagnosis the virus and treatments to end it. Limiting the virus to an epidemic with little loss of life and the memory for most in the affected area being that of a major inconvenience is the best, hoped for outcome.

At this stage, unfortunately, we don’t know how this will all turn out.

What is the Likely Effect on Your Portfolio?

Remember that we are still in the earnings season. So far, the earnings have been good.

Don’t get so caught up in the news cycle that you forget to watch earnings. Earnings are one of the most important drivers of the overall direction of the stock market.

Continued strong earnings reports, including strong forward guidance, should not be lost within the fear of the coronavirus.

Between the coronavirus, earnings season in full swing, and the impeachment trial, especially if witnesses are called, the news cycle will not be lacking for stories.

A typical market reaction to the news of the virus outbreak- assuming things don’t get much worse- is a 1.5 to 3% pullback. This will not be out of the question. The drop would lead the S&P 500 dropping down to around the 3,235 area.

Should worse news appear and additional fear grip the market, a 5-6% decline could lead the S&P 500 down to the 3,100 – 3,150 area.

A stock market with positive 4th quarter earnings declining due to virus concerns should be considered a wonderful buying opportunity.

Being able to separate significant facts from the noise will be critical in determining what to do within your portfolio if anything.

Stay tuned!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.wantchinatimes.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)