Cornerstone’s Week on Wall Street
Stocks ended the holiday-shortened week down on a selloff that accelerated on Friday, after two weeks of gains. The technology-laden NASDAQ led the way lower, falling 1.6%, followed by the Dow Jones Industrial Average down 1.4%, and the S&P 500 down 1.2%. Technology (-2.5%), Industrials (-1.3%) and Financials (-1.2%) led markets lower, while defensive sectors Communications (0.09%), Real Estate (0.05%) and Consumer Staples (-0.09%) fared much better. Bond yields echoed the risk-off sentiment as the 10-Year Treasury fell 12 basis points to 1.47%. The 3-Month-to-10-Year Treasury spread inverted, or went negative, while the 30-Year yield hit an all-time low on Friday. Strength in the U.S. dollar also continued, hitting its highest level in three years, while Gold also surged 3.9% for the week. The coronavirus, now officially known as Covid-19 remained the major story this week, as the disease spread outside of China, impacting Japan and now Europe as well.
Source: John’s Hopkins
The markets have been rocked by fears of the spread of the virus, so in this week’s missive, we will provide an update. The graphic and the link above, provided by John’s Hopkins, show real-time updates on the number of cases, fatalities and recoveries. Over the past two days, (Monday and Tuesday this week) the markets have fallen sharply, with back to back declines of nearly 3% each, and the first 1,000-point drop for the Dow since 2018. Reports that the virus spread into Europe (Italy and Switzerland) over the weekend and early this week along with an increase in infections in Japan and South Korea grabbed the market’s attention.
Exacerbating the volatility, US health officials commented on Tuesday that the virus is likely to cause a global pandemic and asked the public to prepare for an eventual outbreak domestically. The Center for Disease Control (CDC) issued a stark public warning for the United States. "It's not so much a question of if this will happen anymore, but more really a question of when it will happen — and how many people in this country will have a severe illness," Dr. Nancy Messonnier of the Centers for Disease Control and Prevention told reporters during a briefing. She went on to say that cities and towns should plan for “social distancing measures,” like dividing school classes into smaller groups of students or closing schools altogether. Meetings and conferences may have to be canceled, she said. Businesses should arrange for employees to work from home.
As of Tuesday, the U.S. has less than 60 cases, with about 40 of those stemming from the Diamond Princess cruise ship which was docked in Japan. Those infected are in isolated hospitals, and fortunately, there have been no fatalities here. Covid-19 while more contagious than other recent flu-like diseases, has a much lower fatality rate, at 2%, and about 80% of the cases reported mild symptoms. That’s the good news. The bad news is that the impact from the virus is likely to stunt global growth in the first quarter at the very least and will have a real impact on 2020 earnings. Many companies here in the U.S. including Apple (AAPL), Mastercard (MA), United Airlines (UAL), Coca-Cola (KO), and Wal-Mart (WMT) among others have all issued warnings about the impact to future financial results or lowered guidance.
As a result of quarantines, factories have closed, travel is restricted and economic activity, especially in China has ground to a halt. Economists continue to lower projections for GDP growth in China, as estimates have fallen to 3.5% growth, down from 6% estimates pre-virus. China is a key player in the global supply chain, so the impact of the virus is likely to be acutely in China but will reverberate across the global economy on the supply side of the economic equation. Monetary policy from the Fed and other global central banks is targeted toward spurring demand, so traditional tools may not be as effective against a supply shock. Supply shocks typically cause sharp economic disruption but are typically temporary interruptions that delay activity rather than erode it completely. In a positive sign, we are seeing the pace of new infections in China slow, but any reports should be taken with a huge grain of salt.
The big question to ask is what happens to data and markets if the footprint of this virus continues to grow? The extent of the spread and the impacts to the markets are unknowable at this point, but investors should be prepared for volatility, which at times may feel extreme. The fact that markets in the U.S. are (still) richly valued, means that the likelihood for a continued correction is elevated. If the virus begins to spread locally, as the CDC is warning, the results could be exacerbated. Our thoughts on the ultimate market impact have not materially changed from our initial update on Covid-19, which we penned last month at the outset of the breakout, where we wrote:
When looking back at the long-term effects of past epidemics in U.S. stock markets, we found that while past episodes may have added to volatility, they did little change the upward course of markets. The S&P 500 gained 31% in 1997 despite the combination of Avian flu epidemic, Asian financial crisis, Russian default and LTCM collapse. SARS began to infect thousands in 2003, but the S&P 500 still ended the year up 26%. The stock market posted a handful of down days in April 2009 following swine flu deaths but still gained 9.4% that month. Concerns over Ebola stirred in October 2014, though S&P 500 gained over 4% in Q4 that year.
Fortunately, our investment process has our clients positioned well for the volatility. Many of our portfolios are tilted defensively and some of the more tactical strategies have elevated cash levels. We will use the market volatility to execute on our process and continue to align our portfolios in accordance with our long-term roadmap. These market conditions present a great time to discuss your financial plan and investment portfolios with your advisor, especially if there have been any major changes to your financial situation.
Listed market indices are provided for information purposes only and are not intended in any way to be representative of Cornerstone Wealth Group’s client accounts or performance. The holdings and performance of Cornerstone Wealth Group’s client accounts may differ substantially from the listed indices. Market indices are unmanaged and are not available for direct investment.
This material provided by Cornerstone Wealth Group is for informational purposes only. It is not intended to serve as personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment. Any securities mentioned herein are not to be taken as advice or recommendation to buy or sell a specific security. The information provided may not be applicable to your account managed by Cornerstone Wealth Group. Please contact Cornerstone Wealth Group for specific information regarding the holdings and trading activity of your account. Opinions expressed in this commentary do not represent a personalized recommendation of a particular investment strategy to you. Additionally, you should review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data provided is believed to be accurate, but its accuracy, completeness or reliability cannot be guaranteed.
About FactSet: FactSet is a leading provider of financial information and analytic applications to investment professionals around the globe. To learn more about FactSet’s Solutions for Research contact firstname.lastname@example.org or visit www.factset.com. Copyright © 2018 FactSet Research Systems Inc. All rights reserved. #ID226/0118/FSM138
Investment advisory services offered through Cornerstone Wealth Group, LLC dba Cornerstone Wealth, an SEC-registered investment adviser. Custody and other brokerage services provided to clients of Cornerstone Wealth Group, LLC dba Cornerstone Wealth are offered by Fidelity Brokerage Services LLC, Member NYSE/SIPC and Charles Schwab & Co., Inc., Member FINRA/SIPC.
Securities offered through Mutual Securities, Inc., Member FINRA/SIPC. Supervisory office located at 16810 Kenton Drive, Suite 200, Huntersville, NC 28078. Cornerstone Wealth Group, LLC dba Cornerstone Wealth is not affiliated with Mutual Securities, Inc.