Topline: The stock market tanked on Monday—with the Dow Jones and S&P 500 indexes erasing their gains for 2020 as a surge in coronavirus cases outside of China boosted fears of a pandemic and global economic slowdown, but historical data shows that investors shouldn’t panic yet, according to experts.
- U.S. stocks had their worst drop in two years on Monday: The Dow fell over 1,000 points, trading 3.6% lower, while the S&P 500 and Nasdaq Composite lost 3.4% and 3.7%, respectively.
- Investors were spooked on the news that the coronavirus outbreak, which has now infected more than 79,000 people globally and killed over 2,600, has spread to new hotspots like Italy, South Korea and Iran.
- “There was this general expectation that this was going to be a relatively short-lived issue, but now that’s in question, so that’s why we’re seeing this market reaction today,” describes Mark Freeman, chief investment officer at Socorro Asset Management. “What changed? This has truly become more of a global issue—initially it was companies with exposure to China, now it’s broader than that.”
- As more companies talk about the economic impact of the coronavirus stretching to the second quarter and beyond, “I do believe we are entering a new period of volatility, at least in the near-term,” says Lindsey Bell, chief investment strategist at Ally Invest.
- However, it’s important to remember that “while history shows that these kinds of viruses can have a severe impact, they’re temporary in nature,” she says, noting there were five days in 2019 when the market declined 2% or more, but stocks were still strong performers overall last year.
- According to Bespoke Investment Group, the silver lining to Monday’s sell-off is that the market can expect to rebound eventually: “History has shown that investors typically ‘buy the dip’ following big drops.”
Crucial statistics: Combined with its losses last Friday, the S&P 500 has fallen more than4.5% over the last two days of trading. But single-day drops of 2% or more have historically been followed by rebounds in the short-term, according to Bespoke data. Since March 2009, there have been 18 prior S&P 500 declines of 2% or more on Mondays, but that’s usually been followed by a “turnaround Tuesday.” The S&P has gained an average 1% the next day, and over the next week averages a gain of 3% with positive returns 17 out of 18 times, according to Bespoke. Even more impressive, over the following month, the S&P averages a more than 6% gain, with positive returns also 17 out of 18 times.
Crucial quotes: “Fast-moving coronavirus developments in South Korea, Japan, Italy, and Iran over the past few days resulted in a reassessment of the short-lived, “V-shaped” recovery prospects for the global economy,” says Yung-Yu Ma, chief investment strategist for BMO Wealth Management. “The market is now pricing in ongoing concerns in these other countries, which broadens the potential scope of economic disruptions,” he says. “It may take a couple weeks of relatively positive, or at least not alarming, developments for the market to regain its footing.”
What to watch for: Whether important U.S. economic indicators hold steady. “If we start seeing an impact on the more domestic-oriented economic data, like anything consumer-related, that’s when it becomes more problematic,” predicts Freeman. “The consumer has certainly been the stalwart of the U.S. economy,” says Bell. “If that remains solid, that could set a floor for the market in the near-term.” Another telling indicator for the market will be the extent to which coronavirus hits corporate earnings, especially on a longer-term basis beyond just the first quarter, says Freeman. “At this point, we’re looking at it stretching into the second quarter—that’s the whole first half of the year