February 2020: Addressing the Coronavirus outbreak

February 25, 2020

Dear Valued Investor:

Monday was a tough day in the stock market, with the S&P 500 Index down more than 3% as the number of coronavirus cases reported outside of China jumped. Monday’s losses reversed all of this year’s gains so far for the S&P 500 Index and the Dow Jones Industrial Averages. The Nasdaq Composite Index appeared to be holding onto a small year-to-date gain through Monday’s close. After several months of relative calm in the markets, Monday’s volatility probably felt worse than it might have otherwise, but a 3% one-day decline never feels good.

Every virus outbreak is different, but looking back at other major global outbreaks over the last three decades (SARS, bird flu, swine flu, Zika, etc.), we can see that the impact to the U.S. and global economies and stock market has tended to be short-lived. It’s possible the current outbreak has the potential to follow a similar path, although there is still significant uncertainty. The coronavirus has spread more quickly than SARS, the most comparable outbreak, but the policy response also has been more aggressive, and the survival rate has been higher.

To put Monday’s decline into perspective, even in positive years for stocks, the S&P 500 historically has experienced an average peak-to-trough intra-year decline of about 11%. In other words, the S&P 500 has fallen 11% at some point during most years before ending higher. This latest pullback that we’re experiencing has barely reached 5%, and it is still well within the normal range of market volatility. On average, the S&P 500 has experienced three to four pullbacks of around 5–10% per year.

It’s also important to remember that the global economy had started to see a pickup in momentum in late 2019/early 2020, before the outbreak. Leading indicators of economic activity were pointing higher. Purchasing managers’ surveys for the United States and Europe had improved. And corporate America delivered solid better-than-expected fourth quarter 2019 earnings results, with many companies saying good things about their 2020 outlooks.

Many view the coronavirus as a delay in—not an end to—the global economic acceleration story that has been unfolding since December’s U.S.-China trade deal. That momentum has put the global economy and corporations in better positions to weather the coronavirus storm. Most likely there will be global economic impact from the coronavirus over the next several months, but investing fundamentals make the case for a rebound in the second half of this year, potentially with some help from government stimulus.

As difficult as it may be to stay the course in the face of recent market volatility, long-term investors may want to consider that approach. Based on history, it is possible that we may see a return to pre-outbreak levels of global economic growth and corporate profits within the next several months—which could continue to power this bull market and economic expansion through 2020 and possibly beyond.

Please contact me if you have any questions or concerns.

Sincerely,

Wayne Rigney

 

 

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IMPORTANT INFORMATION

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of February 24, 2020.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking # 1-955514 (Exp. 02/21)

February 2020 Client Letter

February 6, 2020

Dear Valued Investor:

The start of 2020 has brought increased stock market volatility. The uncharacteristically calm market environment we experienced for much of the past four months was bound to end, but identifying the catalyst for a potential sell-off became more difficult after the U.S.-China phase-one trade deal was signed. Not even the recent major escalation in the U.S.-Iran conflict could knock down this market. Unfortunately, the coronavirus appears to have done the trick.

That story is still developing, but so far, the coronavirus has been less deadly than the SARS outbreak, one of the best historical comparisons we have. However, the speed with which the illness has spread within China has grabbed the stock market’s attention. Analysis of prior outbreaks such as SARS, bird flu, and swine flu—and the aggressive ongoing containment efforts—suggests the global economic impact likely may be modest and short-lived, although the situation is unpredictable at this stage. The Chinese economy is being negatively impacted by business closures and travel restrictions, which may have spillover effects on the rest of the world, given the size and global interconnectedness of that economy.

In his post-meeting remarks January 30, Federal Reserve (Fed) Chair Jerome Powell acknowledged the risk to the U.S. and global economies from the coronavirus outbreak. He also slightly downgraded the Fed’s assessment of consumer spending, although based on the January gross domestic product (GDP) report, it is possible the U.S. economy could continue to grow at or near the 2.1% pace reported for the fourth quarter of 2019. After the Fed’s announcement, the bond market factored in one quarter-of-a-point interest rate cut this fall. While that action isn’t a given, well-contained inflation would allow the central bank room to make interest-rate adjustments more easily if needed.

The fundamentals of the U.S. economy and stock market—interest rates, inflation, wage growth, and jobs—still appear favorable overall. Although S&P 500 Index companies have reported minimal earnings growth during fourth-quarter earnings season, commentary from corporate America over the past several weeks has helped solidify the outlook for corporate profits in 2020. It still appears profits could be the primary driver of any potential stock market gains over the next 11 months.

Investing fundamentals may continue to help support stocks over the balance of the year, though the magnitude of potential gains from current levels may be limited. In addition, there are some risks to consider beyond those already mentioned: The 2020 election could negatively impact certain segments of the market due to policy uncertainty; the United Kingdom will officially leave the European Union at the end of this year; and trade tensions with China could flare up again.

Bottom line, there may be some bumps in the road, but the economic expansion may continue through 2020 and help power forward this nearly 11-year-old bull market.

Thank you for your business, and please contact me if you have any questions.

Sincerely,

Wayne Rigney

 

__________________

IMPORTANT INFORMATION

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Economic forecasts set forth may not develop as predicted.

All data is provided as of January 31, 2020.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Tracking # 1-946762 (Exp. 02/21)