Coronavirus headlines, combined with overvalued and overbought market conditions, helped cause the fastest stock market correction in history. Here is the S&P 500 chart, which the C Fund tracks:
That brings the S&P 500 back to levels it saw in mid-2019, and not far above some of the peak levels that occurred back in 2018.
This is the fastest that the S&P 500 or Dow have ever fallen 10% from all time highs (which defines a “correction”), even looking back 90 years. There have been bigger and faster drawdowns in the past, including the infamous day in 1987 where markets lost over 20% of their value, but this has been the fastest 10% correction specifically from all time highs, in history.
The C Fund, S Fund, and I Fund all took a fast hit of 10% or more, while the G Fund and F Fund held up. The lifecycle funds, especially the ones on the more conservative end of the spectrum, have also moderated some of the losses thanks to their diversification.
The coronavirus continues to spread outside of China, and has hit Italy, South Korea, Japan, and Iran rather heavily. Japan closed most of its schools nationwide. Saudi Arabia shut down Mecca to foreign pilgrims. France closed the Louvre Museum.
The United States reported its first coronavirus death. It happened in Washington state, and the governor there declared a state of emergency. It remains to be seen how significantly or rapidly it will spread in the United States, and very little testing has been done so far, but the Centers for Disease Control has plenty of information for folks on how to reduce the risk for themselves by taking reasonable precautions.
On Friday, after market hours, we received updated purchasing manager’s index (PMI) figures out of China, which are decent real-time proxies for economic activity. Below 50 on this metric indicates contraction. Both the manufacturing and services metrics took a staggering hit in February due to quarantines and work shutdowns:
In addition to affecting China, this economic halt affects companies in the C Fund, like Apple, because it affects their ability to make products on time, due to supply chain disruptions centered around China.
The U.S. Business Cycle
From an economic point of view, this virus is hitting during a time when the U.S. business cycle was already in a somewhat weak period, with decelerating growth across multiple metrics.
As this heat map of indicators shows, the U.S. economy experienced a significant slowdown in 2015/2016, re-accelerated in 2017/2018, and since 2019 has been back in slowdown territory.
The chart starts from the bottom and goes up over five years (20 quarters), and each column represents one of the economic indicators. As you can see, we had a significant slowdown in the 2015/2016 timeframe, re-accelerated during 2017/2018, and since late 2018 and 2019 we have been in another slowing phase.
Heat Map Indicators Referenced:
• Real Gross Domestic Product
• Industrial Production
• Advance Retail Sales Excluding Food Services
• Total Construction Spending
• Capital Goods Orders, Nondefense, Excluding Aircraft
• Exports of Goods and Services
• Imports of Goods and Services
• All Employees, Total Nonfarm
• 10 Year Minus 3 Month Yield Curve
• Consumer Prices, All Urban Consumers, All Items in City Average
Overall, it is weeks like this past one that show how important diversification is to reduce fast losses, especially as you move closer to retirement. The Lifecycle funds provide the easiest path to diversification, and other accounts outside of the TSP can be used to add additional asset classes if preferred.