Investment Brief: The Impact of Coronavirus on Retirement Plans
Until last week, the coronavirus outbreak had not made a significant impact on financial markets. On February 27, 2020, the Dow Jones Industrial Average went into correction territory, falling 10% below its all-time high. The growing stock market fear is also apparent in the bond market. The 10-year Treasury yield touched an all-time low on March 3, dipping to 0.984%; while the 30-year rate touched an all-time low of 1.601% as of this article’s publication date. The increased demand for conservative bonds is a “flight to safety” often seen in times of market turmoil.
The Corona Virus in Context
There have been many examples of medical emergencies in the past two decades, including SARS, bird flu, Ebola and the West Nile virus. The global economy adjusted and recovered from these outbreaks without significant impact on long-term growth. Each occurrence saw the S&P 500 Index exceed its pre-epidemic high within two months of the initial outbreak (Oakmark). However, it is important to note that not every outbreak is the same, in terms of underlying economic and market conditions. With the most recent recession 11 years ago, the economic backdrop for the coronavirus is notable for the strong stock market run since the Q4 2018 correction and all-time highs just a few weeks ago. Thus, in this situation, there was room for stocks to fall - and perhaps investors needed a reason. Aside from the coronavirus, the recent progress of Bernie Sanders in his bid to win the Democratic nomination and his proposed policies of increased regulation and taxation, has markets leery. This fear may also be contributing to the current market selloff.
Coronavirus has been making headlines for several months now, yet the market is only now reacting. The primary catalyst is the spread of the virus outside of China. South Korea has seen its number of cases spike recently; this week, the number of new reported cases in South Korea exceed the number of new cases in China. With growing concern over widespread outbreak, fears are intensified by each new geographic area affected. At this point, the World Health Organization (WHO) and Centers for Disease Control (CDC) cannot determine the extent of the outbreak.
From an economic standpoint, this creates uncertainty around profits and growth. Goldman Sachs went so far as to predict that U.S. companies will see zero growth in 2020 due to the coronavirus. The Federal Reserve announced a rate cut of 50 basis points, as of March 3, 2020, in order to stimulate the economy and combat any potential impact. After this announcement, equity markets experienced additional volatility and the 10-year Treasury dropped significantly. It is still difficult to predict what will happen next in the financial markets, but additional volatility appears likely.
What Retirement Plan Sponsors and Participants Need to Know
For retirement plan participants, these events are understandably troubling. While the effects and extent of this outbreak are unknown, it is worth noting that there are massive efforts underway to develop a vaccine and contain the spread of the disease. Additionally, 2020 is a presidential election year and political rhetoric from both sides could stoke volatility in the market. It is important for participants to remain focused on their long-term goals and maintain an appropriate allocation to reach them.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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