Update: Read the new comments from our Chief Investment Officer issued March 19, 2020.
In recent days the virus commonly referred to as the coronavirus, which causes the disease COVID-19, has spread to individuals in countries previously unaffected. Originating in China in late December 2019, the disease has quickly moved into the consciousness of investors worldwide as individuals who have had no traceable contact with others with the disease are now testing positive.
One effect of the multiplied rate of infection has been a widespread sell-off in equities and a flight to the perceived safety of bonds, gold, and other havens. While the situation is fluid, U.S. large cap stocks in the S&P 500 have given up gains earned over the past few months, pushing the market into what is commonly referred to as a correction - down more than 10 percent in a short period of time. This correction moved U.S. markets into negative territory for the year to date.
As we have said for some time, large cap U.S. stocks have been priced for everything to go right. In fact, returns on the S&P 500 in 2019 topped 30 percent, nearly all of which was the result of investors’ willingness to pay up for profits and not because of underlying profit growth.
It now appears the coronavirus’s spread beyond a few isolated regions has the potential to make an impact on business activity, at least for a period of time. How much and for how long is beyond our ability to predict, but it does appear that the human costs of this virus may extend into an economic impact, the fear of which has been reflected by investor behavior in recent days.
Viral outbreaks are not without precedent and whether this one becomes a global pandemic remains to be seen. Since this piece is not intended to provide advice or commentary on the disease, please consult the Centers for Disease Control for the latest.
How should we think about our investment strategy in the face of these unknowns? I offer the following observations and encouragements.
- Investing involves accepting risks, some known and many unknown. The presence of COVID-19 was first acknowledged in China in early January, but investors have taken more notice in recent days and are expressing their concerns that the impacts may widen.
- Stocks are expected to be variable, especially over short periods of time. By contrast, our recent experience has trained investors to expect that the ride is relatively smooth. With a few exceptions over the past 11 years, investing in U.S. stocks has felt easy.
- We simply do not know whether COVID-19 will turn out to be as impactful as the markets appear to expect or if it will surprise us by not having the impact investors are fearing.
- Past global health scares including MERS, SARS, Ebola, and others have not had lasting effects on financial markets. Not to minimize the human tragedy of these events or the fear that many around the globe are feeling now, but history suggests markets will eventually find their footing.
- The Everence® Asset Management managed accounts are invested in diversified portfolios with exposure to several strategies and asset classes that may dampen the negative effects of a stock market decline. All but the most aggressive portfolios include positions in bond funds, many of which have generated positive returns year to date.
- Our strategy is to remain invested as we have, relying on the diversification that characterizes our approach in good times and bad.
We encourage you to stay with your plans and to alter them only if your continued exposure to stocks is inappropriate for your specific circumstances.
We on the investment team are closely monitoring the situation and will adjust our strategies as we deem appropriate.