Cutler Commentary

Coronavirus and the Market Sell-Off

February 28, 2020

The headlines are impossible to ignore. February 27th was the worst Dow Jones Industrial Average point drop ever. The fastest 10% market correction ever. $3.4 trillion of value has been erased from the S&P 500 since February 19th. And, yes, these headlines are true. But headlines are not investment philosophies, and they don’t tell us how to invest. We would like to provide Cutler’s thoughts on how our clients should approach the current market. You are always welcome call us to discuss your account or market concerns.

There are two variables driving stocks lower: fear and fundamentals.

Fear is the “elephant in the room.” Investors are rightly scared of the possibility of a global pandemic. This outcome could have severe economic and human consequences. None of our comments are intended to trivialize this possibility. However, fear is a component of the market sell-off that artificially depresses prices. Once the fear subsides, prices can return to their equilibrium.

Fundamentals can have a more lasting effect. Will a complete shutdown of China’s economy have long-term impairments of the global supply chain? Will global travel and trade slow to a halt? What will be the economic impacts of these outcomes?

The balance of these two variables should reflect the true value for equities. With the VIX index (often called the Fear Index) spiking by over 150% over the last week, fear has clearly played a large role in the recent sell-off. But, let’s consider some other fundamental numbers:

  • The rolling 1-year return of the S&P 500 through 2/27 was +8.8%, even accounting for the sharp drop that has happened this week.1  Gains going back multi-year periods are also still quite strong.
  • The 10-year Treasury yield has reached at an all-time low under 1.20%Low yields support economic activity, encourage equity ownership, and mean bonds are working as a diversifier from stock losses.
  • The trailing P/E of the S&P 500 has dropped from 18.5 as of 12/31/19 to about 16.5 as of 2/27/2020. Valuations were stretched, as we noted in our latest Commentary, but they have come down.
  • The best performing global index year to date is the Shanghai composite, right near the nexus of the virus.2 This exemplifies the value of diversification and the need to maintain investment discipline.
  • This is the 26th market correction of greater than 5% since the financial crisis.3  Market drops happen on an ongoing basis and are a normal component of stock investing. 
Panic is not an investment strategy. Patience is. Diversification is. Risk tolerance is. Cutler’s client portfolios are built with a view of risk management. We know that 10% pullbacks happen. Investors may recall the nearly 20% pullback that happened leading up to Christmas 2018. Equities have been a great historical investment, largely because they have inherent risk. While the possibility of a worst-case scenario remains, history would suggest a recovery would be on the horizon. Our view is to continue with your plan. Call us to talk about that plan and how your portfolio is built for today’s market.
1 Morningstar Direct. The S&P 500 Index is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.
All opinions and data included in this commentary are as of February 27th, 2020 and are subject to change without notice.  The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision.  The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. You cannot invest directly into an index. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.



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These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities.   Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed.  Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance.  Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.


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