Market Volatility Amid Coronavirus Concerns

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Investment Strategy Team
March 2, 2020
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Given the current market and headlines surrounding coronavirus, you may be wondering what lies ahead. Many investors are understandably concerned about the challenging price activity equity markets have experienced over the last six trading days.

The following summarizes our Investment Strategy Team's latest thinking regarding the current market volatility.

For perspective, out of the S&P 500's five-day trading periods dating back to 1928, the five-day decline of 11.5% through today's market close is the 55th worst in observed history, which is notable to say the least. If we exclude the Great Depression and look back to the post-World War II period starting in mid-1945, the five-day decline was the 16th-worst ever recorded. In either case, the point remains the same—the past week was anomalously bad by any historical standard. However, these types of dislocations happen more than many remember due to their quick reversals.

We wish to highlight five salient points regarding coronavirus and the current market environment:

  1. While the virus could lead to a pandemic which drastically impacts markets, it is far too early to presume recession is the likely case. We would need to see stress consistently across the global economy, which is currently not occurring. To this point, weakness is found in pockets of certain countries and companies. This development bears watching, but right now, it is not the default scenario.
  2. Given the coronavirus data released last weekend, the direction of this week's reaction was not unreasonable. As Chairman Robert Balentine shared with the Atlanta Journal-Constitution earlier this week, "Markets, as a whole, tend to shoot first and ask questions later."
  3. Do not become captive to the emotional moment; the worst thing anyone can do is sell amid market panic. The appropriate course of action is to let things settle. In the meantime, we will reassess whether the data or our thesis has changed and, only then, act accordingly after thoughtful analysis.
  4. Pandemic scares typically last a few months and, while highly volatile during the process, resolve themselves relatively quickly. There is a chance it could be different this time, but historical data suggests otherwise. In fact, earlier this week, Moderna, Inc. announced it had fast-tracked a vaccine for approval. While the vaccine’s efficacy must be tested in a clinical trial, the galvanization has occurred in record time, as shown in the chart below (measured in months). These stories can change on a dime, and markets will follow suit.

  1. Source: Wall Street Journal
  2. Oftentimes, investors look back and wish they had owned stocks instead of selling them. As the following chart demonstrates, forward equity returns after extreme one-month price moves are higher over the subsequent respective one month, three month, six month, and one year periods, which is greater evidence that panic selling is generally punished more than it is rewarded.
  1. Source: Strategas

We recognize such a dramatic downturn in the span of a few days can be difficult to stomach. However, at Balentine, we encourage our clients to suppress the behavioral tendencies to react emotionally and instead pay attention to underlying, long-term fundamentals. We are keeping a close eye on the situation, are continually reassessing the data, and will act accordingly based on thoughtful analysis.

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