Hopes to keep the coronavirus contained were met with disappointment over the weekend, as the deadly virus spread quickly and aggressively. The entire country of China has virtually shut down, impacting the second-largest economy. As the LPL strategists discuss, this outbreak is quite similar to SARS. That outbreak started in November 2002, peaking in February 2003, and by July 2003 it was contained. Equities globally bottomed in March 2003, while global output quickly made up any weakness over the coming quarters. History shows us that a slowdown and near-term market pullback is quite likely, but longer term these outbreaks haven’t been major disrupters.
After the run stocks have had the past few months, we are beginning to see some warning signs. Remember, when everyone is bullish, this is likely when the good times could end. For starters, the S&P 500 Index is more than 10% above its longer-term 200-day moving average, suggesting things are stretched in the near term. Additionally, various sentiment polls are showing the highest number of bulls we’ve seen in years. The LPL strategists note why this could be why markets are ripe for a pullback, but the good news is we do not anticipate this to be the start of a major bear market.
Think about this — the S&P 500 has gone 30 days in a row without back-to-back losses. That tied the longest streak since 1955. Additionally, the index hasn’t moved 1% (up or down) for more than three months! As the LPL strategists discuss, this wasn’t going to last forever and some type of volatility was likely to happen at any time. The outbreak in China was the spark, but markets don’t stay calm forever and this was more than due.
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