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The longest bull market in history could be coming to an end. The Dow lost 1,000 points on Feb. 24 (Monday) alone, and lost 12% that week. Though it recovered some of those losses, many investors still think the worst is yet to come.
Are they wrong? Or will the coronavirus cause a recession?
The COVID-19 coronavirus has spread to every continent by now. And unfortunately, it looks like the market impact will only get worse before it gets better.
Wall Street is most worried that COVID-19 could start the next recession.
When supply chains are disrupted by people staying out of work, productivity shrinks. Earnings follow, and companies start cutting back. From there, consumption goes down, and savings go up. And the markets tank all the while.
What’s important here is that we don’t actually need an official recession for this to happen. A recession is defined as two consecutive quarters of negative GDP, which means we might not know if a recession is happening for up to six months.
But the stock market will feel the effects of a slowdown in real time. Wall Street doesn’t need an economist to tell them we’re in a recession when they can see earnings dropping or businesses closing.
And it gets even scarier.
Money Morning Founding Editor Bill Patalon actually says the markets have been waiting to correct for a long time. And the coronavirus is just the catalyst to make that happen. He calls it the “Infection Correction.”
Bill points to a time in early 2018, when the S&P 500 was trading at its “highest forward P/E” since May 2002.
His view is that stocks were overpriced at that time. And since then, that distinction is made clearer as earnings forecasts are cut. Analysts at Goldman Sachs Group Inc. (NYSE: GS), for instance, cut corporate earnings projections by 13% for 2020.
With stocks already overpriced, the coronavirus is a very real threat to the stock market. It could be the straw that breaks the camel’s back after a long year of economic uncertainty.
The coronavirus is a “Black Swan” event. That means it’s a completely unpredictable event that disrupts the market from the outside. And that’s why no one can predict how the coronavirus will ultimately affect the market.
But there are measures you can take to protect yourself.
We’ll share how you can protect your money, too. But first, there’s more to the recession story than the coronavirus, and it’s why the pandemic is such a threat to your money...
Spotting Signs of a Recession
The markets had enough to worry about last year without a novel coronavirus.
U.S.-China trade talks were rocky at best. The United States has so far placed tariffs on $550 billion in Chinese products, and China has responded with tariffs on $185 billion of U.S. products.
By the end of 2019, China’s GDP growth was 6.1% - the slowest it had been since 1990. And investors feared this could ripple into the global markets.
When the world’s largest economy struggles, everybody struggles. U.S. GDP growth also stagnated early last year, falling to 2% from 2018 highs of 3.5%. Freight shipments slowed down, and manufacturing slowed to a decade low.
Manufacturing, as a matter of fact, is already in recession on its own, as a sector. It’s experienced two consecutive quarters of negative growth so far.
Concerns ramped up on a few other potential recession signals to accompany the GDP slip.
Possibly the biggest red flag was the inverted yield curve in August, when short-term bond yields rose higher than long-term yields. This was eventually overturned, but it added to speculation that the bull market had gone on too long.
Corporate earnings also slipped last year. Analysts at FactSet had expected 7.6% earnings growth from the S&P 500. But it came out to 2.3%.
Plus, safe havens like gold went up, a sign investors are looking for stability.
The U.S. economy spent all last year building a house of cards. And COVID-19 could be the thing to blow it down.
But keep your feet on the ground. The more volatile the market gets - the VIX has more than doubled in the last couple weeks - the more important it is to be realistic and stick to what you know.
That’s why these strategies are best for keeping your money safe right now…
How to Protect Your Money No Matter What
About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.