Broker Check

A Viral Catalyst to Market Correction

| March 02, 2020

Not long ago, we talked about a market correction on the horizon. That began last week, with the spreading coronavirus being the catalyst.

We saw COVID-19 fears drive significant daily declines, wiping out gains for the year. Frankly, the markets’ resiliency has been amazing, especially with data indicating equities have been overbought for some time.

We think it might be the recent historical interplay between stocks and viruses. Markets tend to overreact to bad medical news, which creates buying opportunities.

For example, in 2003 the SARS virus caused the S&P 500 to fall 12.8 percent. Similarly, In 2015 and 2016, the market fell by 12.9 percent because of the Zika virus.

In both cases, and many others, the market recovered, eventually going on to set records.

To be clear, we are not claiming to be immunologists, nor are we trying to minimize the human tragedy involved. Any economic effects, positive or negative, are secondary to the human impacts.

Recent reports show 80,088 confirmed COVID-19 cases worldwide, with 2,699 deaths. While the disease is still spreading, the pace appears to be slowing. That’s even with recent cases in Italy, Iran, Croatia, and so on.

We believe total active cases, not confirmed cases, is the best way to view the situation. It’s what best determines the disease’s ability to spread further. With that being said, a week ago total active cases peaked at 58,747. More recent data puts active cases around 49,923, which is a 15 percent drop.

To give this situation some perspective, last year and right now, we have a disease that’s infected 15 million people, caused 140,000 hospitalizations, and 8,200 deaths. It’s called the flu.

This isn’t to downplay COVID-19. It’s serious. At the same time, we deal with a more dangerous disease every year. So, perspective matters here.

Thankfully, there is already a drug being tested to combat the coronavirus. In a sign of progress, the drug in this case took a few months to be developed, whereas the SARS virus cure took nearly two years.

And it’s still important to look at the economic effect. At this point, not much has changed. We expected 2 percent gross domestic product growth in the first quarter. That’s where we are.

Most of the impact from the outbreak will come in the second quarter and be focused on firms with business in Asia and supply chain/construction firms. Many companies are already shifting production away from China. That could mute some of the economic effects domestically resulting from this human tragedy.

Correction on Way Before Virus

COVID-19 has had an economic impact, however, this correction was on the radar anyway because of the overbought nature of the markets. The data reflects that in the big money flows.

A pullback was necessary. In the money flows chart to the right, we’ve been in phase two for quite some time. It seems we’re now moving to phase three as a result of COVID-19, and the big money is selling.

That is the time to enter the market.

We’ve seen rotation, as investors are moving to safer equities. The “risk off buying” in the table below shows that – utilities and real estate are safer sectors. Money has also been rushing into gold stocks, which has been on a bull run. In fact, gold recently hit a 7-year high.

As we thought, a catalyst brought on a long-overdue pullback. But for long-term investors, that means it’s buying season.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.