Coronavirus and stocks in perspective

Key takeaways

The coronavirus has delivered a demand and supply shock to the US economy, which is likely to drive earnings down at least through the second quarter of 2020.That could lead to a brief recession, but nothing like the 2008 financial crisis when leverage and excess inventories deepened the slowdown.More Fed rate cuts are likely, and possibly US fiscal stimulus.Stocks may rally and then test recent lows before forming a foundation from which to move higher.In the meantime, stay diversified and stick to your long-term investment strategy.

It's been a bout of market volatility that will likely be seared into our memories for a long time. News that the coronavirus had spread beyond China caused a rapid repricing of the consensus view that an earnings recovery was right around the corner in 2020, and that the stock market's torrid valuation-driven advance in 2019 was justified.

That consensus quickly crumbled as it became clear that there could be a temporary but nevertheless significant shock to both the demand and the supply side of the global economy. And even the Fed's "emergency" half point rate cut did not halt the market slide.

As fewer people travel and go on cruises and possibly are forced to work from home, demand could come down. As countries take turns going into various forms of lockdown, supply chains could be affected as well. It's a double shock to the system. With valuations reaching a lofty 19.1 times the forward (next 12 months) price/earnings multiple at the recent high, any derailment of the bullish narrative was poised to trigger a reset of sorts—and that's what just happened.

  • About the expert Jurrien Timmer is the director of global macro in Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation. He joined Fidelity in 1995 as a technical research analyst.

The timing could not have been worse for a market that was priced for perfection.

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After a swift 15% decline in the S&P 500 (measured from intra-day peak to intra-day low), let's assess the damage and see what we can learn from history.

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