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Market update: COVID-19 and the investment landscape

Anthony Saglimbene, Ameriprise Global Market Strategist

As of 3/18/2020

Looking back

  • The COVID-19 (coronavirus) outbreak has spread globally, oil prices have plummeted and stock prices are down significantly from their all-time highs.
  • Though U.S. economic data has been strong, most measures were taken before the virus hit U.S. shores.
  • As a result, analysts have significantly lowered their first quarter 2020 S&P 500® Index earnings expectations.    

Up ahead

  • We believe the U.S. economy could significantly contract in the second quarter.
  • Job losses could rise and near-term side effects from social distancing will be pronounced.
  • Importantly, U.S. growth could recover in the second half of the year if viral impacts prove temporary.    

Data Source: FactSet

Markets quake as the COVID-19 pandemic spreads 

As recently as Valentine’s Day, investors had showered the stock market with love and affection. Equity prices traded near all-time highs, valuations stretched toward historic levels and COVID-19 was mostly a problem for China. 

It’s a dramatically different situation now. Over the last few weeks, global stocks have faced aggressive selling pressure and volatility. Major U.S. stock averages sit in a bear market (down 20% or more from their high), and equity valuations have come down as earnings growth expectations for this year continue to decline based on the pandemic. 

We believe the market is unlikely to calm down until there are signs the pandemic is diminishing. As a result, investors could face more volatility due to news headlines, as well as seesawing asset prices. 

Quantifying the impact of COVID-19 is a key driver of where stock prices ultimately settle. There has already been a sizable effect on daily living/behaviors around the world, which will significantly stall economic activity. 

Here in the U.S., for example, air travel is grinding to a halt. Schools have been closing. Bars and restaurants have been shuttered. Movie theaters, theme parks and sporting venues are empty or have closed for now.  

The major question for the economy: Will this lead to employment disruptions? Outside of global supply chain disruptions and lower corporate profits, this question gets at the heart of measuring how impactful the virus may become on the U.S. economy. 

Although we expect markets could remain in flux over the near-term, all 11 S&P 500 Index sectors now generate more income than 10-year and 30-year treasury bonds. Some sectors yield a multiple of current government bond rates.  

Investors willing to stomach volatility have an opportunity to buy quality stocks at very attractive yields compared to government bond rates. Considering the growth that stocks can provide over time, historically, these dislocations in stock/bond yields have proven solid buying opportunities over the long term.  

But for now, much about COVID-19 and its impact on the U.S. economy is unknown. Current market conditions argue for caution. 

Three actions to navigate market pressure 

As COVID-19 conditions evolve in the weeks and months ahead, we will evaluate our forecasts, strategy and asset allocation advice. Ameriprise financial advisors are the best source for up-to-date information regarding our market and economic views during this unprecedented period. 

So, what can you do to move forward? 

First: Remember that it is seldom beneficial to long-term investment success to react to this type of market movement or try to time the highs and lows. We believe investors should focus on buying high-quality assets rather than exiting stocks during periods of higher volatility. 

Second: Stay focused on your financial goals. An Ameriprise advisor is committed to helping you navigate changing market dynamics, including bear markets. 

Third: Ensure your asset allocations are consistent with your longer-term risk profile and regularly revisit your investment mix with your Ameriprise advisor. 

Lastly, it is in times like these that having a reliable financial advisor can make all the difference in keeping you and your financial goals on track. Our advice: Stay focused on your strategy and reach out to your Ameriprise advisor with any questions or concerns about market volatility. Ameriprise advisors are available through whatever means are most comfortable for you, including virtually by phone and online. 

The numbers

Indices

S&P sector returns YTD


These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here.

Data source: Morningstar Direct, as of March 18, 2020

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

RISK DISCLOSURES

Past performance is no guarantee of future performance. 

Asset allocation does not assure a profit or protect against loss.

Investments in narrowly focused sectors may exhibit higher volatility than investments with broader objectives. An investment in a sector is subject to market risk economic risk, and mortgage rate risk.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.

INDEX DEFINITIONS

Indexes are unmanaged and are not available for direct investment.

Standard & Poor’s (S&P) 500 Index

The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backward to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

The NASDAQ Composite Index
The NASDAQ Composite Index is a market-capitalization weighted index of all common stocks listed on National Association of Securities Dealers Automated Quotation system (NASDAQ). The NASDAQ Composite dates back to 1971, which is when the NASDAQ exchange was first formalized. Given that this is a market-capitalization weighted index and the fact that the largest market capitalization stocks trading on the exchange are technology related issues; the index is commonly referenced as a measure of technology stock performance, and thus may not be a good indicator of the market as a whole.  

Dow Jones Industrial Average 
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

MSCI EAFE Index
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid-cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.

MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Bloomberg Barclays US Aggregate Bond Index (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The S&P 500 Industrials Select Sector Index measures the performance of industrial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector.

The S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) materials sector.

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector.

The S&P 500 Utilities Select Sector Index measures the performance of utility stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market-capitalization-weighted.

The S&P 500 Consumer Staples Select Sector Index measures the performance of consumer staples stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Consumer Discretionary Select Sector Index measures the performance of consumer discretionary stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) health care sector.

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector.

IMPORTANT DISCLOSURES

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Service, LLC. Member FINRA and SIPC.