A day after the World Health Organization declared the Coronavirus a pandemic, the Dow fell 10%, its worst day since the 1987 market crash. Neither presidential rhetoric nor the Fed pumping money into the system could quell concerns over the economic slowdown stemming from the contagion. The eleven year bull market has officially ended.
What started as a health scare impacting a financial system fragile in spots, has now turned into a global economic crisis. As the world’s governments move to contain the spread of the Covid-19 virus, social distancing efforts have quickly resulted in the cancellation of schools, theme parks, major sports events and travel plans. The seriousness of the situation seems to have finally hit home.
This is not a financial crisis. The rapid re-pricing downward of market securities does not reflect significant underlying financial issues. In the U.S. at the end of 2019 employment numbers were solid, consumer sentiment high, corporate earnings good and our banking system strong. Why is this important? Because, ultimately the health contagion will be brought under control and the fear associated with it will subside. Those fears are the primary cause of the negative momentum driving markets lower. Once removed, investors will see quality securities severely oversold. Buying will begin again and the momentum will turn positive.
This won’t happen overnight. The major halting of economic activity will not restart quickly. We will go into a global recession. Knowing our financial system and much of corporate America is on solid ground will allow the markets to rebound faster, though. Markets will bottom before the economy does. The recession, while severe, will likely be temporary. Expect continued volatility while health organizations and fiscal stimulus bring about relief, calm fears, and heal the pain.
Our defensive instincts in portfolio construction have acted as circuit breakers in the Tompkins investment strategies, providing real downside protection during this market meltdown. Owning quality securities in diversified allocations has, and will, be a benefit. We also continue to advise clients to avoid panic selling, buy opportunistically, raise cash smartly, review risk tolerances, take the long view and communicate openly. While we believe this situation will recover just as other health-related scares have before, we fully appreciate its gravity. All of our investment and financial advisors are at the ready to provide calm, reasoned counsel. Please reach out to them. They want to help.