Morgan Stanley
  • Wealth Management
  • Mar 2, 2020

Putting the Correction in Context

The sell-off in stocks likely sparked by the coronavirus outbreak also reflects a broader set of risks that have been apparent for the past six months.

Lisa Shalett Chief Investment Officer, Wealth Management

It may seem hard to believe now, but the S&P 500 hit a record high more than a month after news of the coronavirus outbreak in China was first reported. On that day—Feb 19, 2020—the index stood nearly 40% higher than its recent low in December 2018.

Manage your Wealth

Find a Financial Advisor, Branch and Private Wealth Advisor near you

After a 14-month run like that, investors should have been bracing for a correction, even if the outbreak had remained contained. Nearly every other rolling 12-month period in history has included at least one market correction, defined as a decline of at least 10% from its top, and we had yet to see one.

Now, investor concern that the virus will disrupt supply chains, impair consumer confidence and lead to economic recession has triggered a 13% drop in the S&P 500 in just seven trading sessions. It’s one of the fastest sell-offs in history. While the spread of coronavirus globally was likely the catalyst, the correction also makes sense in context of the broader set of risks I’ve been highlighting in recent months. These are the main ones, all of which have receded somewhat:

  • Historically high valuations: The price-earnings ratio of the S&P 500 had climbed above 19, within the top 10% of the past 100 years. Now it’s a more reasonable 17.
  • Nonexistent earnings growth: S&P 500 profit growth was flat in 2019, and Wall Street consensus estimates projected about 10% growth this year, which seemed unrealistic. Now, stock prices seem to be aligning with what may be more realistic corporate profit potential.
  • Growing signs of investor exuberance: Extra liquidity from the Federal Reserve had been fueling gains, while measures of investor sentiment and positioning suggested that investors were buying stocks partly based on the fear of missing out. Now, investors are less complacent, which means markets aren’t as fragile. That’s a better foundation for potential future gains.

I don’t want to seem cavalier. Sell-offs this fast and deep can be unsettling. They may signal a paradigm shift that would require investors to adjust their investing strategies.

For now, however, I recommend that investors remain patient. Further downside is still possible, but on the other side of this coronavirus outbreak, demand should rebound, fueling a V-shaped economic recovery. Investors should keep close watch on the evolution of this health crisis and its impact on consumer confidence. Barring a full-blown recession that would likely result in a bear market, it is likely that six, nine or 12 months from now, global stock markets will be higher.

Index Definitions

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Performance of indices may be more or less volatile than any investment product.  The risk of loss in value of a specific investment (such as with an investment manager or in a fund) is not the same as the risk of loss in a broad market index.  Therefore, the historical returns of an index will not be the same as the historical returns of a particular investment product.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

The securities/instruments discussed in this material may not be appropriate for all investors.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. 

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2020 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC#2975610 (3/2020)

View disclosures