Markets Reach Bear Territory as Roller-Coaster Week Continues
COVID-19 is officially declared a pandemic, pushing the DJIA to levels more than 20% below its February high.
The S&P 500 fell by almost 6% on Wednesday, one day after it gained almost 5%. And, of course, Tuesday’s rally came one day after a significant drop on Monday.
With the S&P 500 down ~19% from its February 19 record high and the Dow Jones Industrial Average officially slipping into bear market territory (down 20.3%), market observers remain on edge. Larry Adam, chief investment officer, notes that the unprecedented rate of decline is the result of a so-called “Black Swan” event – the coronavirus – that has added uncertainty as to the extent of the downside risk to both the economy and earnings. These black swan events are inherently unexpected, and they typically prompt investors to quickly recalibrate their market expectations without the benefit of historical precedence.
The markets seem to be vacillating between concerns for the extent of economic damage and hopes the federal government will intervene to stimulate the economy or support certain businesses affected most by the spread of the coronavirus, such as airlines.
Early on Wednesday, the market decline seemed rooted in concern for how the government will respond and the time it might take Congress to approve a stimulus package. Wednesday afternoon, the World Health Organization declared the spread of the virus a global pandemic.
“COVID-19 will have a negative impact on the U.S. economy, but it’s difficult to say how much,” Chief Economist Scott Brown said. “Supply chain disruptions and slower global growth will reduce earnings for a lot of U.S. firms. However, the biggest effect will come through social distancing, as people avoid large crowds. We’ve already seen signs of reduced air travel, event cancelations and declining restaurant business in some cities. However, lower interest rates, lower gasoline prices and expected government stimulus should help to limit the damage and hasten the eventual recovery.”
Earlier this month, we saw an unscheduled interest rate cut from the Federal Reserve. Such monetary stimulus, however, typically takes six months or longer to affect the economy, Brown said. Fiscal policy, which has been the topic of discussion this week, likely could provide quicker relief.
“Fiscal policy tends to be a lot more immediate,” Brown said. “Tax cuts, increased government spending – those could be more effective. But this is very much a dynamic process because we don’t know the extent of the economic damage. We don’t know how much fiscal stimulus is going to be needed or where it’s going to be needed.”
We could be in for “several weeks of conflicting headlines as a package is developed,” Washington Policy Analyst Ed Mills said. Congress is in recess next week.
“As long as there is the probability a large-scale package will be signed into law, we believe that will help provide some support for skittish markets,” Mills said. “However, the health impact of COVID-19 will be a more important near-term driver of market sentiment and economic concern.”
Brown anticipates the Fed will vote for another interest rate cut when it meets later this month.
“Rate cuts are not going to stop the spread of the virus or repair broken supply chains, but they will help to improve financial conditions in general,” Brown said. “They will help to support consumer and business confidence, which is pretty critical at this point.”
That the spread qualifies as a pandemic may help the response.
“Pandemics are epidemics that happen in multiple regions – usually different nations and continents,” healthcare analyst Chris Meekins said. “Labeling it as a pandemic does not change much, but it will likely help lead to better public awareness of steps to take to avoid illness.”
This kind of turbulence can be unnerving for even the most steadfast, long-term investors. Let your advisor know if you have any questions.
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