Since the first media reports of the latest coronavirus outbreak broke in January, COVID-19 has been blamed for three large drawdowns in the S&P 500 Index.
U.S. investors might be more aware of this coronavirus than the SARS outbreak that occurred just over a year after the 2001 recession hit bottom because global markets and industrial supply chains are now tightly integrated, Thomas Nun, portfolio strategist, and Rachel Lin, investment analyst, with Great-West Investments note.
COVID-19 is caused by a member of the coronavirus family that’s a close cousin to the SARS virus.
Josh Kutin, head of asset allocation, North America, and Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy, Columbia Threadneedle Investments, point out in a blog post that disruption caused by the virus has already filtered down to earnings. Tech bellwether Apple was the first major U.S. company to announce that it expected to miss revenue projections for the quarter as a result of the epidemic.
“Even if the momentum of the long bull market is still intact, the higher volatility keeps us from being too optimistic about equity market opportunities in the short term,” they say.
Monday, the Dow lost 1,031.61 points, or 3.56% of its value, while the NASDAQ fell 3.71% and the S&P 500 lost 3.35%. This was followed Tuesday by losses of 3.15%, 2.77% and 3.03%, respectively.
According to the Alight Solutions 401(k) Index, retirement plan participant trades to fixed income were 3.95% above normal on Monday. The two-day activity for Monday and Tuesday was 4.37% above normal.
In their commentary, Nun and Lin say “even if the economic costs ultimately prove to be material, recent experience also suggests that the worldwide economy should be able to bear those costs fairly easily, unless the outbreak gains significant momentum or mortality rates increase substantially.” They add that it’s hard not to see motives behind the recent sell-off as something other than fears about the coronavirus outbreak itself and perhaps more about a correction in stock prices that was overdue anyway given the strong run-up since the end of 2018.
However, “regardless of whether the U.S. market’s recent reaction to COVID-19 was a rational response to illness-related uncertainty or an overdue correction of past excesses,” they say, “the best way to navigate volatility like this is to resist the temptation to panic and stay the course.”
“Although the unfortunate reality is that volatility like this may be here to stay until the coronavirus runs its course, experience has proven time and time again that cool heads typically prevail,” Nun and Lin state.Market volatility is a good time for retirement plan sponsors and advisers to remind plan participants about the fundamentals of investing for the long-term. John Diehl, senior vice president of strategic markets for Hartford Funds, previously told PLANSPONSOR, “These bouts of volatility actually present a challenge and an opportunity for you to go back to the fundamentals that everyone should regularly be focusing on. In this respect, the longer-term context of this week’s market moves is crucial to emphasize. Market gains in the U.S. and globally have been really strong over the last several years for those who have been strategic and patient, so you need to remember this as you view the market moves occurring right now.”