January reintroduced volatility to the stock market, as concerns of the coronavirus caused investors to rethink their positions. It is becoming more apparent that the disruption caused by the virus (factory shutdowns, travel bans, etc.) may cause a reduction of global growth in 2020. Growth was already projected to be tepid, so this certainly has the potential to bring growth to a crawl. I have not seen any predictions, but I have heard some commentators say that it could slow global growth by as much as 0.8%, which is significant.
According to “The Coronavirus and Volatility,” an article written by a Raymond James research team (available on request), market pullbacks due to epidemics (SARS, MERS, Ebola) are usually short-lived. There are many other factors that go into the “recipe” for market performance, so it’s very difficult to isolate 1 “ingredient” and determine its impact.
For the month of January, the S&P 500 was nearly unchanged, down about 0.16%. The 10-year US Treasury bond yield fell from about 1.91% to 1.52%, as investors bought bonds as a safe-haven from stock turbulence (when investors buy bonds, it pushes bond prices up, which causes the yield to go down). The NASDAQ Composite Index had a great month, up nearly 2%, as technology stocks continued to lead the way. Gold rose a bit, since it is also seen as a hedge against stock risk.
The pullback, although small (the S&P 500 fell a bit more than 3% from its January 22 high), leads me to believe that now is a good entry point into stocks. I mentioned in my January update that the market was overbought, and that some bad news could lead to a pullback. We’ve gotten that, but low interest rates, plenty of liquidity, strong chart patterns, good jobless claims numbers, and a pullback in investor sentiment are all favorable for stocks. I do believe there are key support levels just below us for the market, so I’ll want to make sure they hold up. Those levels range anywhere from 1 to 6% below where we are today, so more downside is conceivable, but I’ll be using pullbacks to add to stock positions. In particular, we favor technology and industrials.
Either way, now is a great time to ask yourself, “How would I feel if the market fell 10%? How about 20%? Or 30%?” Rather than trying to predict the market’s direction, which you can’t control, it may be more constructive to predict your reaction to it, which you can control. If you can’t stomach a 10% pullback, stocks might not be right for you. After considering this, check with us so we can walk through good case and bad case scenarios for your portfolio to see if its construction is aligned with your risk tolerance.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.