Markets Staggered By Coronavirus

Stock markets were rocked earlier this week with back-to-back losses of over 3%. This came after news over the weekend that the coronavirus had spread into Italy and South Korea.

Here are a couple of points to think about:

1) The stock market has fallen 5% or more 16 times since the current bull market began in 2009. Included in this time period were two different declines in 2019 of 7% and 6%. Despite those pullbacks the S&P 500 ended the year up nearly 30%.

Another one of these declines occurred early in 2018. After a great year for markets in 2017, gains extended into January. That led to excessive optimism from investors and the market fell over 10% in less than two weeks. Here is what the chart looked like in 2018:

We have similar circumstances in place now as we had in 2018. In both cases the previous year had been very good for the markets. This was followed by a move higher in stocks to begin the new year. In 2018 investor sentiment became too bullish as investors looked to take more risk assuming the markets would continue to go higher. This year investor optimism did not reach the levels seen during 2018, but they were knocking on that door before the coronavirus began to dominate the headlines. That said, here is the chart from the past week that looks very similar to 2018:

2) U.S. Economic data continues to be really strong. Unemployment Claims, which are viewed as a leading economic indicator, are still near a 50 year low. Just this morning New Home Sales came out at a 12 year high, growing 7.9% over this time last year. These are just two of the many data points that illustrate the strengths of the U.S. economy. This is critical because it means the U.S. is in a better position to handle a pullback in economic activity due to the coronavirus.

3) Jeffrey Gundlach, who is known as the “bond king”, said today that he believes a big part of the market pullback this week was due to Bernie Sanders’ rise in the polls.

“If this stock market reversal is due exclusively to the virus, then why is United Healthcare down far more than SPX?” Gundlach wrote in an email to CNBC’s Scott Wapner, referring to the S&P 500. “Why is healthcare as a sector broadly not outperforming? Answer to these questions: the market is digesting a better than 50% chance of Bernie getting the nomination.”

Of course it is really difficult to know how much of the stock selloff may be due to Sanders’ rising poll numbers, as well as his decisive victory in Nevada over the weekend. It is true that many influential Democrats in politics and in business are working hard on behalf of other candidates, as they are concerned Sanders’ would not be able to win the election. There is a long way to go here so we will see how it plays out.

In late January we wrote that no one could know what the coronavirus would do in the weeks and months ahead and that it would not be a surprise to see markets continue to struggle. That is still the case today; more volatility is to be expected. We continue to like our current investment mix, but will continue to closely watch the markets and will make any necessary adjustments.

More to come soon; have a good evening.