Ongoing fears of the coronavirus have led to multiple financial impacts – particularly on Wall Street, where stock prices are fluctuating wildly.
Concerns of the virus, coupled with low crude oil prices, battered the stock market March 9, as the Dow Jones Industrial Average dropped over 2,103 points, or 7.8%, closing at 23,851. It was the worst one-day percentage drop for the Dow since October 2008. The market rebounded some the next day, closing March 10 up 1,167 points, or 4.9%. However, the Dow shed 1,464 points, or 5.9% March 11, taking it more than 20% below its recent high from February and into a bear market.
Don Davis, vice president and senior portfolio manager at Commerce Trust Co., said the market is likely going to remain “very volatile and choppy.”
“Typically when you have those kind of days, it’s a flushing out period for the market,” Davis said. “But it’s hard to hold those gains when there’s that kind of uncertainty. No decline in the market like this really ends in an orderly fashion.”
Both Davis and Ken Homan, senior vice president and senior portfolio manager at Central Trust Co., have been telling clients not to panic. They agree the U.S. economy is strong and can withstand a short-term disruption.
“Now would be the worst time to sell off your equity investments. You have to resist that temptation,” Homan said.
Davis said his company has been proactive in visiting with clients about stock market corrections in the future and proper asset allocation. He estimated around 20% of his clients have reached out to him in the past couple of weeks since the coronavirus started impacting the U.S. stock market. Most are simply asking what is happening, rather than wanting to make immediate changes to their investment portfolio.
“As this continues, we will have a lot more discussions about what’s going on and what we’re doing to mitigate the risk inherent in the market right now,” Davis said. “The key is to make sure we have appropriate asset allocation.”
While financial advisers work to ward off concern among their clients, Missouri State University economics professor David Mitchell said the general public is starting to get into panic mode. Some don’t want to go out in public or they decide to stock up on toilet paper and hand sanitizer when they do leave their home, he added.
“The underlying economy is still really strong,” he said, pointing to the U.S. 50-year low unemployment level of 3.5% and low borrowing rates, around 3.75% for a 30-year fixed rate, as of March 11, according to Wells Fargo.
The recent stock market impact is “more a reaction of fear instead of a change in fundamentals,” Mitchell said. “The underlying fundamentals are strong so any impact should be short lived and mild. It’s not like there’s some giant shock that has caused the fundamentals to change.”
Homan agreed, adding most of the big one-day drops on Wall Street are driven by program and high frequency trading, which commonly run on preset algorithms to make trades quickly.
“It has very little to do with fundamentals,” Homan said. “As investors, we always go back to the fundamentals.”
Part of the public’s concern stems from the worldwide spread of the virus. The Centers for Disease Control and Prevention reported the first U.S. case Jan. 21. As of March 12, 1,215 people nationwide, including one from Missouri, have tested positive for COVID-19, the disease caused by the coronavirus. The U.S. death toll had risen to 36 as of March 12, according to the CDC.
Homan said one predictability about the stock market is that it overreacts to fear and uncertainty. This big market drop might be different, though, because what could possibly happen is so broad.
“Fear could disappear in a month or two or linger for a long time,” Homan said. “Consumer confidence is deteriorating fast, much along the same lines as it was in December 2018, most recently.”
The fear that drove down confidence then was the prospect of rising interest rates, Homan said. That was unfounded, as the Federal Reserve ended up cutting the rates three times in 2019.
For the first time this year, the Fed slashed the federal funds rate by half a percentage point to a range of 1%-1.25% – a move widely seen as an emergency measure to keep the economy on track.
“It was an acknowledgement that they are aware that there is a problem,” Mitchell said.
Eye on the future
In a March 11 national address, President Donald Trump said he would instruct the Small Business Administration to provide capital and liquidity to companies affected by the virus, and he plans to ask Congress to increase funding by $50 billion for low-interest loans to small businesses. Additionally, the Treasury Department is being instructed to defer tax payments for people and businesses impacted by the virus.
Trump also said health insurers agreed to waive all copayments for coronavirus treatments and extend insurance coverage.
In support of coronavirus response efforts, the CDC announced March 11 it was providing nearly $9.9 million to Missouri. The money is part of $560 million the agency awarded the same day throughout the U.S.
As the U.S. stock market continues to fluctuate, Davis said it’s due for a correction, in which stocks drop 10% from their most recent peak. With a bear market typically defined by declines of 20% or more, Homan said the drop March 9, from mid-February, when the Dow was around 29,500, was just under 20%.
“But it would be a rarity if the coronavirus would create a recession that typically coincides with the bear market,” he said. “If it does create a recession, it would surely be short lived.”
Homan and Davis agreed hospitality and travel industries, such as hotels and airlines, are also likely to be negatively impacted short-term, and possibly longer, depending on how long the coronavirus remains a concern. Three of the four carriers that fly into Springfield-Branson National Airport – United Airlines, Delta Air Lines and American Airlines – have announced plans to temporarily reduce capacity on a nationwide scale, according to airport spokesman Kent Boyd. For instance, United plans to reduce capacity on flights between Springfield and Chicago by 4.3% in April, he said.
“Unless we have a real long lasting pandemic created by the coronavirus, I can see the economic numbers being really soft in the second quarter of 2020,” Homan said, adding market recovery could follow in the second half of the year. “Best case, it’s under control in the next few weeks before the damage is done and the market could recoup much of this downturn.”
SBJ is providing coronavirus coverage for free so that all readers have access. It is our desire to keep the business community informed of the most important news and guidance on the outbreak. Complete COVID-19 coverage can be accessed here.
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