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As of this morning, the S&P 500 has lost about 11% over the last 5+ trading days. A 10% decline is known as a “correction” in stock market parlance, and corrections historically have occurred annually. The speed of the drop is not unusual, but the reason for the drop is more disconcerting: the uncertainty around the impact of the Coronavirus on global growth, corporate earnings, and ultimately stock prices.
Let us be clear, the impact on humanity and protecting and saving lives from a possible pandemic are what is most important. We are in no position to even try to provide a prognosis on containment, as that is best left to the experts at the World Health Organization, Centers for Disease Control and Prevention and the National Institute for Health. So, without trying to trivialize the reason for the stock market volatility, our thoughts on the current situation from an investor standpoint are summarized below:
· We expect markets will remain volatile until a concrete plan of containment or a lessening of the spread of the virus takes place. From all the information we have available, this is weeks away at the earliest.
· We currently expect global growth to take a short-term hit, which will be more significant if the spread becomes more severe. Consumption, the biggest part of the U.S. economy, will be delayed, not permanently impaired.
· We do not believe the long-term (10+ years) prospects of the thousands of companies in the public markets are worth significantly less today than they were just a month or two ago. They will have short-term earnings and sales shortfalls as activity slows, but long-term most business will continue normally.
· Historical comparisons with other epidemic/pandemics (SARS, H1N1, Ebola, etc.) suggest a return to economic normalcy within about a quarter after containment. The uncertainty at this point is the timing of containment.
· We believe there is currently no reason to change long-term strategies, and in fact, we may be approaching the point where “buying the dip” becomes reasonable.
It has been a good run in the markets and volatility after outsized positive returns is not unusual. Markets were probably a little too optimistic in minimizing the impacts of the Coronavirus and when reality hit, they reset. As experience has shown, these types of outbreaks are short-lived and markets ultimately get back to trading on fundamentals.
Please feel free to call your Relationship Manager or an Investment Team member if you have any additional questions or would like to discuss further.
This material has been prepared by Market Street Trust Company. The views expressed herein represent opinions of Market Street and are presented for informational purposes only. They are not intended to be a recommendation or investment advice and do not take into account the individual financial circumstances or objectives of the investor who receives it. Certain statements included in this presentation constitute forward looking statements. Forward looking statements are not facts but reflect current thinking regarding future events or results. These forward statements are subject to risks that may result in actual results being materially different from current expectations.
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