We knew it was going to happen eventually. China has done a reasonable job of containing the coronavirus within its borders, and it appears that the number of new cases is starting to decrease. This is good news because they are restarting their industrial engines and will be coming back online over the next few weeks. However, with an unexpected outbreak near Milan, Italy, there is a new threat that the virus may get out of hand in Europe. Since Europe is the most densely populated area in the western industrial world, the concern is that it may not be contained quickly and that would slow the EU economic system to a potential recession. There has also been a breakout in South Korea as reported Friday.
This is not the time to be bold and jump into what could become a bigger selloff, but it has not yet turned into a selloff that will drive the markets significantly lower. The indexes can hold near their 50-day moving averages that will bode well for a slow correction that could last through the spring. If the algorithmic traders jump onto a sell signal again like they did on Monday, Jan. 24, it could lead to significant selling going into the rest of this week, and that would take us down dramatically more. There isn’t any clear expectation on how the virus will spread in either Korea or Europe, so until there is some news in the next few days, the markets will continue to be very jittery.
In addition to the coronavirus, politics is having a smaller but significant impact as Bernie Sanders appears to have taken the lead in the Democrat presidential primaries. It is a long time until the elections, but Wall Street is concerned about what might happen if Mr. Sanders were to step into the White House, and that has added more tension over the weekend. All the news will continue to keep this high level of volatility in the markets throughout the rest of this year, and we hope that the coronavirus behaves like the influenza virus and drops off as we get into spring.
There should be opportunities to invest into the equity markets later this year, but now is a time to be dollar cost averaging in and not making a big bet. For those folks that are already fully invested, I would consider lightening up on up days in anticipation of the Federal Reserve lowering interest rates sooner than we originally expected. We aren’t headed into a 2007-2009 recession, but this will at least be a slowdown in GDP for the first and probably second quarter. Remember that 1000-point drop in the Dow Jones 30 is only 3%, so it is half of what we saw in 2008.