“The stock market takes an escalator up, and an elevator down.” – a classic Wall Street saying
Part of our communication protocol is to reach out to you when the stock markets enter correction territory – down more than 10% at closing from a previously established record high. The S&P 500 and Dow Jones Industrial Average both did that last week. Although uncomfortable, when we experience these kinds of swings, it is important to remember that corrections are a common occurrence in the stock markets (though not usually as rapid as what we experienced last week). For decades, the average annual sell-off from a peak to a trough in the S&P500 has been about 14%.
We have to remember that “volatility” does not mean “down a lot in a hurry”, except in the media. It just means that stock returns are highly unpredictable in the short to intermediate term. Over history, the premium return of stocks is just an efficient market’s way of pricing in that greater uncertainty. In that sense, volatility/uncertainty is one cause of stock’s substantially higher returns. For our Clients in the accumulation phase, this and all declines are a gift as they enable us to accumulate shares at marked-down prices. This “correction” can be otherwise called a “sale”. For our Clients in the distribution phase, this is why we carve-out a couple of years of portfolio income and leave those funds in cash and cash-equivalents so we can ride out the waves. I hope you are comforted during times like these with our strategy.
Fears around the coronavirus are the reason for the stock markets’ most recent swift sell-off. As you can see in the below chart, we have had other major global outbreaks over the last 40 years. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%. There are other examples, but they all passed, and the market recovered and hit new highs. Will this happen again? Our view is that it is highly probable.
This whole thing is a human tragedy and we would never take human life and suffering lightly. And looking at data can make people appear cold, when in reality all they are trying to do is understand the situation. There are currently 80,088 confirmed cases and 2,699 deaths from the coronavirus COVID-19 outbreak as of Monday, February 24, 2020. This is a big number and is still growing, but the pace of growth looks to be slowing.
Much of the pessimism surrounding the virus focuses on the Chinese under-counting the number of infected to save face. However, it’s important to note that a shortage of specialized test kits has caused health officials in many countries to rely on observable symptoms for diagnoses, and because coronavirus mimics the flu and pneumonia in its early stages, it’s also possible that authorities may be over-counting as well.
One death is too many, but to put that number into a little bit of perspective, according to the World Health Organization, in the United States alone for the 2019-2020 season, there have been at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of this annual flu, case by case, hour by hour.
It’s true that the death rate from Coronavirus appears to be around 2% in China, which is much higher than the death rate from the normal flu, but like the flu increases with age. However, outside of China the death rate is far less than inside China, roughly 1%. And, there is already a drug that will combat COVID-19 moving toward first phase clinical trials. It took three months for this to happen in 2020, versus 20 months for SARS back in 2002/03 - a testament to advances in drug technology.
The US consumer is on solid footing and will continue to be one of the key drivers to US economic growth in the year to come. We believe, just like all the other viruses we have seen over the past decades that have dissipated, the Coronavirus will be no different. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come. Don’t panic and focus on what we can control.
Please let me know if you have any questions. As always, thank you for allowing us to help you in the achievement of your financial goals! It is an honor, and one we don’t take lightly.
All my best,
Sources: Brian Wesbury and Bob Stein, First Trust & LPL Research