Coronavirus and the Markets – What’s Really Causing Investment Losses This Week?

By Chris Hostetler

The investment markets have dropped significantly this week on the news of the spread of coronavirus cases and impacts in new countries. Prudent investors absolutely should be reviewing their financial plan and investment approach, but it is as important as ever not to panic.

Let’s be clear – we are not recommending that you put your head in the sand and avoid preparing for the potential spread of coronavirus. But don’t let that cause you to make emotional mistakes in your investment portfolio.

Coronavirus is the novel trigger for this week’s market movements. But even before this week’s news, many thoughtful investors were beginning to question their risk profile and consider whether a slowdown might be approaching. If we can personify the markets, they appeared to be “getting tired” and probably waiting for an excuse to enter a correction (generally defined as a drop of at least 10% from a price peak).

Markets are trying to balance a lot of risks along with the coronavirus scare – trade wars, the US political situation, Britain’s evolving departure from European Union. Underlying all of these current events, though, is the recognition that economic growth tends to move cyclically, and it is natural to see slowing growth at the end of a long recovery.

When we filmed our latest quarterly market outlook video in early February, it was still uncertain whether this virus would spread much beyond China’s borders. But even then, we acknowledged that the ceiling for the markets wasn’t high, and we were expecting heightened market volatility this year.

Primarily, this volatility was to be expected because the US and global economies were in the late stages of the growth cycle:

  • Economic growth in the US and internationally was slowing – for 2019 US GDP growth was estimated at 2.3%.1 Global GDP growth was estimated at 2.9%.2
  • The US unemployment rate is at a historically low 3.6%.3
  • Interest rates are low – The Federal Reserve and other central banks have maintained stimulative policies in attempts to stave off recession (aka negative economic growth).
  • Corporate directors have been buying back shares, a typical late-cycle use of corporate cash.
  • The US stock market, in particular, has grown pretty steadily since the financial crisis of 2008-2009, and 2019 was a particularly good year.
  • We have not seen a recession since the one that ended in June 2009 – the longest streak since records began in 1854 according to the National Bureau of Economic Research.4

It is not yet clear how unique this strand of coronavirus disease, officially known as COVID-19, actually is. Scientists are still gathering information and learning how to deal with this strand. But within the last 20 years there have been outbreaks of related viruses, SARS and MERS, which came and went without a major impact on long-term global growth.

And we can find important perspective by comparing coronavirus to the flu. In the 2018-2019 season, the Centers for Disease Control estimates that the flu infected 35.5 million people in the U.S. alone and killed 34,200.5 Coronavirus, meanwhile, has a known global death toll of 2,462 as of February 24, 2020.6

So what do you do with this information as an investor? Do not allow yourself to get distracted by any one current event, as concerning as it may be. Focus on the bigger picture. Remember your plan, and be mindful of your cash – you should have an emergency reserve, plus enough cash to cover any extra expenses you have planned in the next one to two years.

If you are uncertain how this market volatility affects your plan or how your portfolio is managed for risk, we encourage you to talk with your advisor. If you are not working with Hilltop currently, we are happy to provide a second opinion.


This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.

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