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Stocks could recover in a big way following coronavirus fears: What to watch in the market in March

Twenty/20

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

The U.S. stock market has jumped higher to start off March, after enduring its second-worst month since the financial crisis. In February, the S&P 500 and the Dow Jones Industrial Average tumbled more than 12% from all-time highs earlier in the month, and both benchmarks entered a correction, defined as a slump of at least 10% from a recent high.

To blame for the market's turbulence has been the coronavirus. Its spread around the world and now in the U.S. as well has stoked fears that an outbreak could slow global economic growth. On March 3, the Federal Reserve announced an emergency rate cut of half a percentage point in response to the growing economic threat from the coronavirus.

And it's been a wild ride in other markets, as well: Treasury rates plunged to all-time lows, oil prices plummeted the most since 2008, and gold prices surged to the highest level in seven years.

Looking ahead to the remainder of March, investors are asking whether the worst of the sell-off is over, particularly as the S&P 500 has surged 6% to start the month through Wednesday. History suggests that stocks could be due for a big comeback.

At the onset of the month, traders were betting that the Fed would cut rates by a half-point — and that ended up happening even before central bankers convened. Meanwhile, professional investors will closely monitor the coronavirus news and some key economic reports to gauge whether U.S. growth was slowing even before the market turbulence. Finally, following Super Tuesday's contests, voters in more than a dozen other states will head to the polls for Democratic party presidential primaries.

Here's what you need to know about the month ahead.

'How scared are people' as a result of the coronavirus?

What's happening: What's likely to be the main driver of markets for the foreseeable future? "Coronavirus, that's pretty much it," says Brad McMillan, the chief investment officer of Commonwealth Financial Network. That's because professional traders are trying to predict the effect on the pace of global growth.

As a result, McMillan says he'll pay particular attention to the following economic reports:

  • The monthly jobs report. This is scheduled for release on March 6, and economists currently project that the pace of hiring slowed in February.
  • Consumer confidence. In addition to monthly reports from the University of Michigan (with a preliminary reading due on March 13 and a final reading on March 27) and the Conference Board (due on March 31), he'll monitor weekly gauges released by Bloomberg each Thursday.
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How do economic cycles work?

Video by Courtney Stith

Why it matters: While professional investors can estimate the possible economic impact as a result of the coronavirus, "the real wild card is what it does to confidence," McMillan says. The jobs report will show if business leaders pulled back on hiring in February, which could signal the economy was already slowing prior to the market sell-off.

Meanwhile, consumer spending accounts for about two-thirds of U.S. growth, so McMillan will be looking for answers to the following questions: "How scared are people? Are people staying home and not spending?" 

What it means for you: For now, many questions remain about the coronavirus, from how quickly it will spread in the U.S. to how it will affect markets and the economy. In addition to the precautions you can take with your health or travel plans, Monday's sharp increase should serve as a reminder to stay invested during periods of turbulence so as not to miss benefiting from a market rebound.

'The Fed's hand will probably get forced'

What's happening: Even prior to the start of the month, traders were expecting that the Fed would cut interest rates by 50 basis points at their meeting, scheduled for March 17 and 18. Central bankers took action before that meeting; they slashed rates by the most since 2008 during the financial crisis and lowered the federal funds rate to a range of 1%-1.25%, down from 1.5%-1.75% previously.

Looking ahead to April, traders now forecast a 60% probability that the Fed will lower rates once again, but by 25 basis points this time.

Why it matters: Powell pledged to act to keep the U.S. economy on track, and traders saw a rate cut as inevitable. "It's hard to see the Fed pushing back on expectations, especially considering sentiment in the market," Mike Dowdall, a portfolio manager at BMO Global Asset Management, said before the surprise announcement. "The Fed's hand will probably get forced at this point."

It's hard to see the Fed pushing back on expectations, especially considering sentiment in the market.
Mike Dowdall
portfolio manager, BMO Global Asset Management

The risk, however, is that slashing interest rates will serve to stabilize markets more so than boost the pace of U.S. growth, Dowdall said at the time. And that could leave the Federal Reserve with fewer options to act if the economy eventually does slow significantly. 

What it means for you: In light of the Fed's latest rate cut, there are smart money moves you can make now, including shopping for higher rates on savings accounts and looking at your refinancing options. The Fed lowered interest rates three times in 2019 in an effort to stimulate growth, which was been a factor in making it cheaper for consumers and businesses to borrow money.

Bottom line

Historically March is a middle-of-the road month for the market, with the S&P 500 rising 0.6%, according to figures compiled by Yardeni Research. At current levels, the market is almost 8% below its all-time high set on February 19. That said, it's still up more than 12% in the past 12 months and up a whopping 49% in the last five years.

The question for March is how quickly the market will rebound, and whether it will keep rising at similar rates as it was previous to the late-February sell-off. Since World War II, the average correction for the S&P 500 has lasted four months, and it took another four months for the market to recover, according to analysis by CNBC and Goldman Sachs. On average, this benchmark tumbled 13% before bottoming out and beginning to rise again.

Still, experts caution that there's likely to be more bumpiness ahead. In addition to uncertainty surrounding the coronavirus, the upcoming 2020 presidential election season could cause temporary moves in the market as the leading Democratic nominee emerges. 

Regardless of what happens in the coming month, remember that you don't need to make any changes to your long-term investing strategy based on short-term events. The market's performance in 2019 is a good reminder to stay the course.

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