Previously, we noted that market volatility caused by concern over the spread of the coronavirus could continue, but is likely to be more of a near-term issue for the market. Eventually, the illness and its effect on the economy will pass. When they do, we expect markets to recover. Accordingly, stock investors should look beyond present volatility while keeping an eye on their long-term financial goals.
With that being said, how might markets react over the short-run to the spread of the disease, and what might a recovery look like?
We envision three potential scenarios.
In the first scenario, markets remain volatile while the coronavirus continues to spread. However, once it becomes apparent that the virus has mostly run its course – for example, the number of newly diagnosed cases peaks – markets should stabilize and then rebound.
In the second scenario, it becomes clear in the coming weeks and months that although the human toll of the virus is substantial, the economic cost is manageable. American businesses – arguably the most adaptive and resilient in the world – find ways to make due during the health scare. In this scenario, markets recover in the coming months as the incoming economic data and corporate profits reassure investors.
In the third scenario, the spread of the disease (or the efforts to contain it, similar to the lockdown recently announced in Italy) do in fact have a near-term impact on the economy. Consumer confidence declines, spending falls, and some Americans lose their jobs as a result. In this case, we believe investors will pay close attention to the jobs market to get a read on the economy. In particular, every Thursday the government reports the number of Americans that file for unemployment benefits. In this scenario, once it is clear that the number of jobless claims has peaked, markets will likely stage a rebound.
Exactly how the next weeks and months play out, we cannot say. However, we urge investors to be patient during this period, and caution that the perceived “cure” during periods of market stress (selling all your stocks) can be much worse than the “disease” (market volatility), especially if it causes you to miss out on an eventual market recovery.