Yesterday, the market indexes took their biggest hit since December 2018, with broad selling across most sectors. Concerns about the coronavirus outbreak had been reasonably contained until late last week, when reports of more infections spread beyond China. Over the weekend, outbreaks surprised people in Italy and South Korea. Estimates now indicate that the effects of the various efforts to contain the virus could shave $1 trillion off of global GDP. So far, the United States has been little affected by the actual virus itself, but shutdowns in China and elsewhere are disrupting the supply chain, leading to parts shortages, and that is hampering production. That’s the bad news.
The good news, is the otherwise underlying fundamentals of our domestic economy are quite healthy. Growth remains solid and is improving. Trade barriers are dropping. Wage gains are rising nicely as a by-product of one of the tightest labor markets in half a century. Corporate earnings are coming in ahead of expectations, and productivity continues to increase. Recent market weakness, just days after achieving all-time highs, and prospects for global growth slowing, will only add pressure for the Fed to maintain, or even reduce, interest rates. Inflation is well under control. These are the factors that drive the markets over the longer trends. And this is what we’re focused on as long-term investors. International markets have borne the brunt of this decline, and we are purposely under-weighted in foreign positions.
Another development came to light over the weekend as well, and while it hasn’t been included in news analysis of yesterday’s market activity, we’d suggest it combines with the coronavirus developments to add fuel to the fire, and made yesterday’s decline worse than it otherwise would have been. That development is the strong finish Bernie Sanders made in the Nevada caucus. It appears a self-proclaimed socialist will very likely secure the Democratic party nomination and go up against President Trump in November. Free markets, which are all about property rights – and your investment holdings are your property – do not like the prospect of wealth confiscation and expanded government control over the economy. That lowers the value of all property, including the stock of corporations. One week from today is Super Tuesday, and that will likely define the outcome of that race.
Some sort of pullback was likely to occur in the near term anyway, as the last year of gains have been blistering, and some profit taking is in order. Specifically, the market has posted more than an average year’s worth of gains just since October. These negative developments provided a catalyst for reversal. Today’s market action appears to be a latent follow-up, with continued sliding. Volatility measures and bearish sentiments are rising, which are historically contrarian indicators of market bottoms. Whether or not indexes are nearing a bottom remains to be seen, but we see holding positions, and not selling into weakness, as the prudent choice at this time.