Bernie or the Virus?

Not a good week and a really bad Friday, with the Dow down -1,031 points, or -3.5%, due mostly from the Coronavirus, though maybe a bit from Bernie Sanders overwhelming Nevada win. We are coming at the Coronavirus drop from two different angles on our research.

One is what happened from other worldwide health scares (SARS, Ebola, Swine Flu). In the previous cases the market experienced sporadic downside volatility until worldwide cases peaked and started to decline.

The market ran early last week on news that China said a new Coronavirus case peak was reached/coming soon. Now, while that may or may not be true in China, it is certainly not true outside of China. Thus we expect this drop to get worse before it gets better. We’re headed into choppy air, the captain has put the seatbelt sign on.

At this point there is minimal US and worldwide economic disruption, but that ceases be true if the cases continue climb in the developed world. With recent new cases in Italy, South Korea and Japan we will likely know a great deal more in the next two weeks.

The second angle is from the history of stock market declines. We are currently -5% off of our market peak last Wednesday, 2/19. We see -5% drops about 3x per year on average. More than 2/3’s of those drops do not hit down -10%. Thus it does not make a great deal of sense to sell into every -5% decline.

At -10%, which happens about once per year, the odds drop slightly to 60% of markets do not go down -15%. By the time we hit down -15%, steam is picked up and the majority of markets, 58% are down -20% or more. By that measure it is too early to begin to take evasive action at this point, but we will be watching very closely to see if this does indeed accelerate.

We should see government stimulus and Federal Reserve action soon, which will help the markets, but we would expect things to be bouncy over the next few weeks.

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