Don’t let coronavirus fears change your investment strategy

In late February, news that coronavirus continued its spread around the world raised the temperature on the market. This week, the U.S. market declined about 10%, the steepest pullback since December 2018, when U.S.-China trade war tensions incited a selloff that wiped out a year of gains. Like the trade war, the coronavirus outbreak is serious news that will have measurable impacts beyond just this spike in volatility.

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While no comparison to the human toll the coronavirus outbreak has had, its effect on world markets is a rapidly evolving story, but we think ultimately a temporary one. The story is dominating the news cycle in the U.S. and around the world, so it’s no surprise that the topic is top of mind for investors, especially those approaching retirement who saw a sharp drop-off in 401(k) and IRA balances during the selloff.

Markets don’t take well to uncertainty, and given the continuing uncertainty around the effectiveness and timelines of containment efforts, it’s unlikely market anxiety and volatility will subside quickly, but for long-term investors, there’s no need to panic. We doubt the market impact of the virus will permanently impair the broader fundamental backdrop of economic expansion and low interest rates, supporting the case for the bull market to persist as we advance through 2020.

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The coronavirus outbreak has disrupted global supply chains and hurt the earnings of American companies. Apple’s AAPL, -0.06% iPhone factory shutdowns in China caused the company to become one of the first major companies to reduce its second-quarter revenue guidance because of supply chain disruptions.

U.S. companies that rely on China for production, or as an end market, will all be affected until the disease outbreak is brought under control. Travel bans will likely hinder the operations and revenues of global air carriers, and perhaps most impactfully, efforts to reduce the spread of the virus may curb consumer spending for a period of time.

All of these household and business interruptions could add up to a modest but measurable decline in U.S. GDP growth for the first quarter. We expect GDP to print below 2% for the first time since late 2018 when the trade war took a chunk out of the economy.

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In the near term, we expect that coronavirus will cause higher stock price volatility and worsened stock market performance for the first half of the year. As economic growth slows, corporate earnings forecasts will likely be revised downward and equity performance could be muted or negative.

While the economic impact of the coronavirus is meaningful and unpredictable, at this stage we believe the U.S. economy can avoid a recession in 2020. The current economic expansion (the longest in U.S. history) is poised to persist this year due to solid consumer spending, supported by a healthy labor market, high savings rates and low interest rates. Despite this positive consumer outlook, we expect headwinds from slowing global growth, trade tensions and sluggish business investment to keep 2020 growth below the 10-year expansion average.

As we entered 2020, business investment growth had been in a three-year decline, mostly from manufacturing companies pulling back in response to the trade war. The coronavirus outbreak has made conditions harder for global manufacturers but it will have less of an impact on the much larger and more economically significant service sector.

Central banks have been accommodative world-wide and it’s unlikely that the U.S. Federal Reserve will switch to a tightening stance given the short-run coronavirus effects, so easy credit conditions should support at least modest levels of business investment.

All in all, the foundation of the long-growing U.S. economy remains intact, supporting further upside for equities over time, though volatility will remain prevalent in the near term. Market swings are not abnormal, even in this strong bull market, which has experienced several 10% corrections over the past decade.

With the constant barrage of negative headlines, it can be easy to panic. There’s a top story every day and while most of them don’t seem relevant to a long-term market outlook, more significant events like the trade war or the coronavirus outbreak might compel us to make radical changes to a well-considered investment strategy. At the end of the day, remember that the economic impact is meaningful, but temporary.

It’s important to put this in context: while market declines are unpleasant, they’re also common. On average, the stock market endures a decline of at least 10% about once a year. Historically, these losses are recovered more often than not, and the overall trajectory of the markets, like the overall trajectory of the economy that the market reflects, is toward growth. Focusing on longer term goals rather than day-to-day fluctuations isn’t easy, but it has consistently proven successful. A knee-jerk reaction from heightened emotions can derail your entire investment strategy, especially when retirement is on the horizon.

If you’re feeling particularly worried, take this time to meet with your financial adviser, who understands your long-term goals and can help put the market conditions into perspective. Working with him or her will help you understand how this market reaction may impact your situation and actions you can take to stay well-positioned toward your goals.

Craig Fehr is an investment strategist at Edward Jones.

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