The Correction is Here But Disruption is Transitory

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By Victor Zhang - February 28, 2020

Fear has gripped equity markets as investors attempt to assess how deeply the rapid spread of coronavirus (COVID-19) will affect the global economy. 

Key stock market benchmarks have fallen into correction, which means they have dropped 10% from a recent high. This includes the S&P 500® Index, which set a record by correcting over the course of just six trading sessions. The Dow Jones Industrial Average and the Nasdaq Index also corrected.

We’ve Been Here Before

Investors have experienced 26 corrections since World War II and 10 in the last 20 years. On average it has taken approximately four months for the market to recoup its losses. There’s no way to know if stocks will head up from here or continue into a bear market, which is generally considered to be a 20% decline from a recent high. There have been two bear markets in this century, the most recent accompanying the global financial crisis which ended 2009.

In a recent post, I discussed the parallels between COVID-19 and the SARS outbreak of 2002-2003. My colleagues at Avantis Investors have looked back even further, reviewing some of the lessons learned from viral outbreaks dating as far back as 1918. History tells us viral outbreaks are disruptive, they take a tragic human toll and they understandably cause worry in the near term. But they eventually come to an end and recovery begins.

Supply is Disrupted

COVID-19 has had a major impact on the supply side of the global economy. Quarantine and other restrictions have proven to be effective means of controlling the outbreak in China, which is a critical link in the global supply chains of companies of all stripes. Though manufacturing is beginning to recover, and workers are slowly returning to their offices, they’re a long way from operating at capacity.

In the U.S., businesses as diverse as technology companies, retailers and tow truck manufacturers can expect to experience delays in receiving finished goods or parts. Apple was one of the first companies to warn investors about disappointing results due to virus-related production delays. More recently, Microsoft told analysts demand for Windows products was in line with expectations, but the recovery in manufacturing has been slower than expected.

Demand Remains Stable

So far, employment and household income aren’t affected by the supply disruptions. While demand for some consumer discretionary businesses is weaker, demand for health care goods and services are expected to rise. Response to COVID-19 has altered consumption behaviors but not harmed aggregate global economic demand. In the coming weeks we will pay close attention to monitor how this outbreak affects consumer spending and employment.

Transitory Doesn’t Mean Painless

We expect volatility to continue as markets react to news headlines about COVID-19’s impact on both communities and economies. Describing this disruption as transitory isn’t meant to diminish the very real impact on those who are affected by COVID-19 or downplay the near-term repercussions on businesses and the economy. Rather, it reflects our view that, after a period of uncertainty, this event will find a bottom and the recovery will begin.

In the meantime, we haven’t altered the way we execute our investment strategies for clients.  As difficult as it may be under the current circumstances, remaining disciplined against human behavioral tendencies is a proven way to achieve long-term success.

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Victor Zhang
Chief Investment Officer
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