Brexit fears couldn’t topple the bull market last year, nor could an escalating trade war with China, a presidential impeachment, and a potential military showdown with Iran that included attacks on the world’s largest oil facility and the U.S. embassy in Iraq.
But in 2020, stock markets appear to have met their match in the new coronavirus, which last weekend escaped China’s best efforts at containment.
“People have woken up to the risk,” said Tom Nun, a portfolio strategist with Great-West Investments in Greenwood Village. “You have seen this migrate outside of China.”
And what a rude awakening it has been.
Last week, both the S&P 500 and the Nasdaq composite index hit all-time highs and analysts touted how that was justified because the global economy was picking up steam and the bull market had plenty of room left to run.
But in less than a week, the S&P 500 has shed 7.6% of its value and the Nasdaq is down 8.67%. The Dow Jones industrial average is off 8.36% from its high reached on Feb. 12, while the Bloomberg Colorado index, a basket of 60 stocks based in the state, is down 6.48% since Feb. 20.
A market correction is defined as a 10% decline, and a bear market would be ushered in with a 20% decline.
On most Fridays since the outbreak of COVID-19 became an issue, the market has sold off. Traders were concerned about holding positions over the weekend. But then prices would march higher again.
“The market was priced close to perfection. People are starting to question perfection,” said Nun.
That, in turn, raises the question as to whether stock markets faced a correction regardless. The outbreak exposed how little margin the markets had after surging nearly 30% last year or 35.2% in the case of the Nasdaq.
Millions of people are being forced to stay at home and hospitals in affected zones are overwhelmed in China. Public gatherings are being canceled in several countries, airlines are eliminating flights, and international tourism is falling off a cliff. Supply chains are getting stretched, a shortage of components could eventually disrupt more manufacturing and companies are pulling back on providing guidance on future sales and earnings.
Edward Moya, a senior market analyst with Oanda, said in a commentary that even if the virus is contained in places it has spread to like Italy, sentiment has been damaged and fears of a global recession will likely grow in the coming weeks.
“Risk aversion could easily remain in place over the next couple weeks on pandemic fears and investors may choose to wait to see if the selloff hits the 10% or 15% thresholds before jumping back in,” he said.
But Nun said those saving for retirement should avoid panic and keep their current allocations, assuming they are appropriate, rather than selling and rushing into safe havens as some are doing.
“You are better to stay calm and stay the course,” he said. “We are in a wait-and-see mode. What matters more are company fundamentals and earnings.”
Brad Bartick, director of Charles Schwab’s Denver branch, said clients of the investment firm don’t seem overly concerned with what is happening this week. Some are viewing it as an opportunity to rebalance their portfolios.
“The market activity this week is a good measure of your true tolerance for risk and what you can stomach, so it makes sense to revisit how much risk you’re taking with your investments to make sure it’s appropriate relative to your situation and goals,” he said.
Long-term investors need to realize markets don’t always go up. Greed isn’t an investment strategy, but neither is panic, he said.
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