Coronavirus panic has sent global stock markets to the sickbay, setting up for a one-week market pullback that will likely be the largest one week decline we have seen since the global financial crisis of 2008. This volatility is not surprising, as the number of new coronavirus cases continues to increase. With thoughts of a pandemic on the horizon, market analysts have adjusted their forecasts for economic growth and corporate productivity. As a result, we have seen share values of even the highest quality companies fall as investors consider new lower forecasts for corporate profitability in 2020. Stock markets are now trading at the same levels that we saw four months ago in October 2019, which you can see on my chart of the S&P 500 index below. The S&P 500 is a stock market index that tracks the stocks of 500 large U.S. companies. 

My team and I have been preparing for something like this throughout 2019 as we reduced the stock market exposure in portfolios, adding to fixed income and starting positions in market-neutral investments - which are designed to retain their value and grow even if the stock market is losing ground. Well balanced investment portfolios have been impacted less as the appeal of guaranteed income moved high-grade bonds up in value. 

I have researched other health events including HIV, SARS, and the Swine flu, and I found that, while these past events had also weighed on global stock markets, we typically saw a full recovery - and even growth - within six months of the end of the epidemic. I have included a table showcasing how the S&P 500 index has been impacted by 12 comparable events.

For a little colour commentary, I have included a few highlights from Tomas Garretson's (Senior Portfolio Strategist with RBC Wealth Management) February 27, 2020 update: 

What a difference a week makes. Since the S&P 500 peaked at 3,386 on Feb. 19, it has fallen by approximately 12 percent over the past seven trading sessions as the spread of the coronavirus picked up outside of China. While 10 percent-type corrections are a normal occurrence across any economic cycle, 10 percent corrections over the course of barely a week are less so. In the some 10,000 trading days since 1980, there have only been 14 such week-long periods of losses exceeding 12 percent.

The impact of the coronavirus on corporate earnings and sales, whether among U.S. multinationals or companies headquartered elsewhere, will take a long time to sort out.

As companies begin to estimate the financial hit, this disease is proving far more difficult to assess than even the topsy-turvy trade risks between the U.S. and China were last year. The spread of the coronavirus carries with it many unknowns for multinational companies with complex global supply chains or meaningful sales in the hardest-hit countries. 

The best case is that the coronavirus fears fade as quickly as they appeared. But as long as the underlying U.S. economic fundamentals remain intact, we still anticipate most equity markets will finish the year in positive territory. Staying invested is often the best strategy, and that is likely to remain the case.

This disease outbreak illustrates the benefits of diversification. While U.S. stocks are down 10 percent over the past week and have erased year-to-date gains, aggregate U.S. bond indexes are up one percent. The classic 60/40 stock/bond portfolio is still flat for the year.

Here is a look at the stock market numbers on February 27, 2020:

Equities (local currency)	February Month-to-Date	2020 Year-to-Date	1 Year Return
S&P 500	-7.7%	-7.8%	6.7%
Dow Jones Industrials (DJA)	-8.8%	-9.7%	-0.8%
NASDAQ	-6.4%	-4.5%	13.4%
S&P/TSX Composite	-3.5%	-2.0%	4.0%

 

Daily market fluctuations highlight why a combination of discipline and perspective is key to achieving long term investment goals. One way to reach this fine balance is by having a plan, tweaking it periodically, and embracing it through all types of market conditions.  This may sound easy, but investors have been put to the test recently.  Veering off course from a well thought-out plan can turn a temporary loss of confidence into a realized loss within an investment portfolio.

Watching pullbacks are always difficult but, unfortunately, we believe they will always be part of the long term experience of an investment portfolio. We will continue to adhere to our guiding principles that we have established and ensure our lines of communication stay open.

While the fear and panic we are seeing circulate can be more contagious than the disease itself, it is important to remember that we have experienced many similar panic-inducing events in our lifetimes, and when it comes to successfully navigating markets in this period of volatility, it is important for all of us to keep a level head and not let panic control our reactions. If you do have any concerns or questions on how the coronavirus could impact your wealth management goals or your investment portfolio, please feel free to contact me at (403) 341-8868, brad.weatherill@rbc.com, or click here.