Market and Performance Update – The stock market really shot up for a while in February. The Dow hit an all-time high on the 12th of 29551. But like the month before, the last week of the month was a real struggle. China came down with the Coronavirus and the American Stock Market got the flu. On Monday, February 24, the Dow dropped by 1032 points. On Tuesday it was down another 879 points. Wednesday saw a little relief in that the Dow was down only 124 points. On Thursday, the carnage continued with another drop of 1191 points. Then on Friday the Dow dropped 328 points to end the week at 25409, 3583 points and 12.36% lower than the week before. From its high, the Dow had fallen 14% in 11 trading days to the end of February. The Dow finished 2019 at 28538, so after two months the stock market as measured by the Dow Jones Industrial Average was off 11%. Some folks have asked me if I think the stock market drop is a result of the coming elections. I don’t think so. They are too far into the future to be affecting the stock market this much this soon. The Democrats haven’t made their decision yet, so the electorate is not yet focused on President Trump vs. the Democratic nominee. That will come, but not until the fourth quarter.
No, the reporting on this virus out of China is scaring a lot of people, and it’s not just the health scare. It’s the fact that the supply chain of goods from many of the affected companies is being disrupted. Factories around the world are idle because of quarantines by their local governments. So other factories in other parts of the world can’t get the parts they need to make their products. That causes everybody to lose money. Meanwhile, the virus continues to spread. However, it may be a good idea to have a little perspective on the issue. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%. There are other examples, but they all passed, and the market recovered and hit new highs. There has been two deaths in the US (as of this writing) attributed to the Coronavirus. According to Worldometer, which aggregates statistics from health agencies across the world, total active cases as of 2/29/20 are 86,021 with 2942 deaths and 39,801 recoveries so far.
One death is too many, but to put that number into a little bit of perspective, according to the World Health Organization, in the United States alone for the 2019-2020 season, there have been at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of this annual flu, case by case, hour by hour. It's true that the death rate from Coronavirus appears to be around 2% in China, which is much higher than the death rate from the normal flu, but like the flu, the death rate increases with age and ill health. However, outside of China the death rate is far less than inside China, roughly 1%. And, there is already a drug that will combat COVID-19 moving toward first phase clinical trials. It took three months for this to happen in 2020, versus 20 months for SARS back in 2002/03 - a testament to advances in drug technology.
From a macro-economic point of view, the real question is how will this impact the US economy over the coming year. Not much, in my view. I believe the US is relatively insulated, with a fantastic health system. The US started the year with solid economic data and so far, nothing has changed. In fact, with all the data we have on hand, I am expecting around 2% growth in the first quarter of the year. Most of the impact to the US from the corona virus will come in the 2nd quarter. Revenues and earnings from companies that are highly exposed to China will definitely be affected. China being shut down for a month will have a global impact. But lower earnings in the first half of the year should be made up by a strong rebound in the second half of the year with payback from lost months. Demand remains strong and there has been no visible impact yet on the job market as shown by initial unemployment claims. Supply disruption is the issue. I suggest that you look past the current weakness in the market. I think it will be transitory. With all that said, people can and do panic and talk down the market during times like these. And while a contrarian may be doubling down on a weak stock market, we manage RETIREMENT assets for our clients, so making huge bets on the market is probably not the most prudent thing we can do for them. That means we will be sitting on the sidelines for a little while until the populace gets a psychological handle on this new virus. Then we will re-employ the money. It’s not exciting, but you pay us to be prudent with your hard-earned assets.