Topline: The stock market tanked on Monday—with the Dow
Jones and S&P 500 indexes erasing their gains for 2020 as a surge in
coronavirus cases outside of China boosted fears of a pandemic and global
economic slowdown, but historical data shows that investors shouldn’t panic yet,
according to experts.
·
U.S. stocks had their
worst drop in two years on Monday: The Dow fell over 1,000 points, trading 3.6% lower, while
the S&P 500 and Nasdaq Composite lost 3.4% and 3.7%, respectively.
·
Investors were spooked
on the news that the coronavirus outbreak, which has now infected more than
79,000 people globally and killed over 2,600, has spread to new hotspots like
Italy, South Korea and Iran.
·
“There was this
general expectation that this was going to be a relatively short-lived issue,
but now that's in question, so that’s why we’re seeing this market reaction
today,” describes Mark Freeman, chief investment officer at Socorro Asset
Management. “What changed? This has truly become more of a global
issue—initially it was companies with exposure to China, now it’s broader than
that.”
·
As more companies talk
about the economic impact of the coronavirus stretching to the second quarter
and beyond, “I do believe we are entering a new period of volatility, at least
in the near-term,” says Lindsey Bell, chief investment strategist at Ally
Invest.
·
However, it’s
important to remember that “while history shows that these kinds of viruses can
have a severe impact, they’re temporary in nature,” she says, noting there were
five days in 2019 when the market declined 2% or more, but stocks were still
strong performers overall last year.
·
According to Bespoke
Investment Group, the silver lining to Monday’s sell-off is that the market can
expect to rebound eventually: “History has shown that investors typically ‘buy
the dip’ following big drops.”
Crucial statistics: Combined with its losses last Friday, the
S&P 500 has fallen more than4.5% over the last two days of trading. But
single-day drops of 2% or more have historically been followed by rebounds in
the short-term, according to Bespoke data. Since March 2009, there have been 18
prior S&P 500 declines of 2% or more on Mondays, but that’s usually been
followed by a “turnaround Tuesday.” The S&P has gained an average 1% the
next day, and over the next week averages a gain of 3% with positive returns 17
out of 18 times, according to Bespoke. Even more impressive, over the following
month, the S&P averages a more than 6% gain, with positive returns also 17
out of 18 times.
Crucial quotes: “Fast-moving coronavirus developments in
South Korea, Japan, Italy, and Iran over the past few days resulted in a
reassessment of the short-lived, “V-shaped” recovery prospects for the global
economy,” says Yung-Yu Ma, chief investment strategist for BMO Wealth
Management. “The market is now pricing in ongoing concerns in these other
countries, which broadens the potential scope of economic disruptions,” he
says. “It may take a couple weeks of relatively positive, or at least not
alarming, developments for the market to regain its footing.”
What to watch for: Whether important U.S. economic indicators
hold steady. “If we start seeing an impact on the more domestic-oriented
economic data, like anything consumer-related, that’s when it becomes more
problematic,” predicts Freeman. “The consumer has certainly been the stalwart
of the U.S. economy,” says Bell. “If that remains solid, that could set a floor
for the market in the near-term.” Another telling indicator for the market will
be the extent to which coronavirus hits corporate earnings, especially on a
longer-term basis beyond just the first quarter, says Freeman. “At this point,
we’re looking at it stretching into the second quarter—that’s the whole first
half of the year.”
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