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Quarterly Market Outlook: Coronavirus Tips the Scale

In our 2020 Market Outlook, we looked at a bifurcated economy asked “What may tip the scale?” We got our answer in the first quarter: the novel coronavirus.

As COVID-19 spread around the world in the early months of 2020, governments enacted quarantines, travel bans, school closings and other measures. Global supply chains were disrupted. Reduced demand is weighing on many industries, starting with travel, hospitality and leisure. Oil prices dropped after Saudi Arabia boosted production, in effect launching a price war with Russia. U.S. Treasury yields fell to record lows.

Amid the uncertainty, analysts have cut earnings estimates—especially for the first quarter—while many companies have withdrawn earnings guidance altogether. With the “E” (earnings) and the “P” (price) in the price-to-earnings (P/E) ratio both dropping, assessing stocks’ valuations on forward-looking earnings has become nearly impossible.

Estimated earnings growth has been cut

Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 03/16/2020.

So what do we expect going forward? It’s especially difficult to make forecasts during a global shock like the coronavirus, but here’s what we know now:

Global recession risk has risen

Although it’s likely we are entering a global recession, it’s too early to predict the magnitude. In response to the threat posed by COVID-19, the Organization for Economic Cooperation and Development (OECD) lowered its global gross domestic product (GDP) growth forecast recently by a half percentage point, to 2.4% for 2020. Generally speaking, global growth below 2.5% is recessionary.

However, global growth may bounce back quickly after the coronavirus recedes. Economic data was encouraging prior to the outbreak, with signs of a recovery in global manufacturing activity and continued strong U.S. jobs data—both of which are at risk again. Any rebound could be helped by a flood of fiscal and monetary stimulus—central banks in the U.S., China, Australia, and Mexico have already cut interest rates, while government fiscal stimulus has been added in Italy, Japan, South Korea, and the United States. More is likely on the way.

U.S. Treasury yields could stay low for a long time

We expect central banks and governments to continue efforts to cushion the potential economic blow. The Federal Reserve already has cut the federal funds rate—its benchmark short-term rate—to a range of 0% to 0.25% in an effort to support the economy through the crisis.

Fed officials announced on March 15 that they expected “to maintain this target range until [they are] confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” This could take quite a while, considering inflation has been below the Fed’s target for a few years and the unemployment rate is likely to rise. We expect the federal funds rate to remain near zero for an extended period of time.

Containment will be key

In past epidemics, such as SARS in 2003, stocks didn’t bottom until global new-case growth stabilized. While new coronavirus cases have continued to rise outside China, new-case growth seems to have peaked in mainland China. Aggressive measures taken in countries such as China and South Korea show that containment is possible.

Historically, stock indexes have tended to return to their previous trajectory within a few months of the peak in global new-case growth.1

What investors can consider now

There is no one-size-fits-all answer for how to respond to an event such as coronavirus. The best approach is to match investing strategies to your personal circumstances. However, here are a few steps to consider:

  • Appropriate portfolio diversification among various asset classes is very important. This includes domestic and global stocks, large-cap and small-cap stocks, and various fixed income investments, among others. These assets generally don’t all move in the same direction at the same time, so when one investment is performing poorly, another may perform more strongly. Diversification can help buffer your portfolio from the ups and downs of market volatility.
  • We strongly recommend periodically rebalancing your portfolio back to its long-term asset allocation targets. Rebalancing means buying and/or selling assets to return your portfolio weightings back to their original desired levels—for example, 60% stocks/40% bonds, or another target allocation that is appropriate for your goals and investing time frame. Schwab clients can log in and use the Schwab Portfolio Checkup tool to find out whether their asset allocation still matches the original target. If you’re not sure how to rebalance your portfolio, a financial advisor or a Schwab Financial Consultant can help.
  • U.S. large-capitalization stocks continue to be preferred over small-cap stocks. Overall, large caps have lower debt levels, better profitability; while they’re also more nimble with regard to tariff- and virus-related adjustments to their supply chains.
  • Within your fixed income portfolio, we strongly suggest moving up in credit quality and exercising caution around riskier securities, such as high-yield bonds, because if economic growth slows it may become harder for less-creditworthy borrowers to make interest payments. Also, consider cash investments, such as money market funds, or short-term Treasuries or certificates of deposit (CDs). These have relatively low interest-rate sensitivity and historically have been relatively stable during periods of market upheaval.
  • Don’t overlook the importance of diversification within the international portion of your portfolio. Headlines make for poor investment advice, and foreign stocks may outperform domestic stocks even during periods of global uncertainty.


¹ Source: Charles Schwab, FactSet, based on returns of the MSCI World Index from 01/01/1970 through 2/28/2020, including the following global outbreaks: HIV/AIDS (1981), pneumonic plague (1994), SARS (2003), H5N1 avian flu (2006), dengue fever (2006), H1N1 swine flu (2009), cholera (2010), MERS (2013), Ebola (2014, 2018), measles (2014, 2019) and Zika (2016). Past performance is no guarantee of future results.

What You Can Do Next

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Important disclosures:

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see

Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. High-yield bonds and lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Small-cap stocks are subject to greater volatility than those in other asset categories.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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