Coronavirus Fear “Sparks” Overdue Correction in Stocks

 In Strategy Updates

After months of rising stock prices, coupled with low volatility, global stock indexes have experienced more than normal volatility – mostly to the downside. Much of the blame can be targeted at the increasing fear that the coronavirus will lead to a global pandemic.

Though we are concerned about the virus and saddened by those who have been stricken or lost their lives, we highly doubt – based on multiple factors – that it will stop global economic growth in its tracks or for that matter the US economy. During these moments it is important to consider the facts and data, listen to the experts, and avoid panic when hearing words like “outbreak” and “pandemic.”

Earnings and Economic Growth
As of last week most companies in the US and overseas had reported stellar earnings for the most recent quarter. This was also coupled with strengthening economic data in a number of sectors of the economy and most significantly in housing. There is little doubt that we have a strong and resilient economic climate.

The Coronavirus – COVID-19
Although the virus is highly contagious, it has an overall mortality rate significantly less than those that have come before it, such as SARS. The mortality rate is a mere 2-3% compared to 10% for SARS and nearly 50% for most Ebola outbreaks. In the US there are only 57 confirmed cases or less than .00002% of our population.

Though we know these figures could get worse before they get better, we are confident that today’s advanced medical technology will find a way to mitigate the spread of the virus and find a way to alleviate those affected. Fortunately, the World Health Organization’s most recent report suggests that the rate of contagion is slowing in China.

In terms of current stock market conditions, we view the coronavirus as the “spark” needed to touch off an overdue correction and extended period of low volatility – not the end of global growth as some would suggest. It has been a while since we have had a normal 7-10% stock market correction, so if it feels uncomfortable, we understand. However, keep in mind that at this point there is no evidence to show that this recent volatility will lead to something worse. We expect a bit more downside lies ahead before the market finds its footing – which will probably be on the heels of good news on the containment front which many great healthcare companies are working 24/7 to deliver.

As you know we are seasoned risk managers and continue to employ strategies to fend off catastrophic loss through your portfolio’s allocation to stocks, sector management and the use of carefully placed stop loss orders.

Over the next days and weeks our team will be monitoring the situation very closely and we are available should you wish to discuss your portfolio.

Your Team at Main Street Research

If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.