Financial markets in the U.S., until just over a week ago, seemed to be collectively thinking that the coronavirus would remain mostly an Asian story. With the announcement last weekend of a rash of cases in northern Italy, investor perceptions and priorities changed quickly. Risk assets (such as stocks) began to drop on heavy volume as money streamed into safe haven assets such as U.S. Treasuries. On Wednesday, the Centers for Disease Control and Prevention (CDC) called the arrival of the coronavirus inside the United States “inevitable.” Over the coming months, the CDC believes it is likely to spread not just here in the U.S. but around the world.
A Human Tragedy
The coronavirus is a true human tragedy, with the number of global confirmed fatalities from the disease now at 2,800. More than 83,000 have been infected. Because the symptoms of infection are mild in roughly 80% of cases, there are probably many, many cases that have occurred or are occurring that are not in the official figures. Thus far, cases have been reported in 56 countries.
Swift Equity Market Reaction
Financial markets’ reaction to the spread of the coronavirus outside of Asia has been swift. Globally, equity markets have lost $5 trillion in value in the last ten days. U.S. stocks have taken a beating, posting the single worst week since the financial crisis of 2008. The S&P 500 Index set a record—6 trading days—for moving from an all-time high to a “correction,” which is a decline of 10%. As I write this, the S&P 500 Index is down 14.6% from the high it reached on February 19. (Hard to believe that was just last week . . .) While the spread of the coronavirus has provided a credible pretext for a sharp market decline, stocks, to be fair, were already priced very optimistically after posting a stellar performance in 2019. They really needed no major excuse for a significant retrenchment.
Bonds Continue to Gain
As investors come to grips with the coronavirus, U.S. Treasuries, as a classic safe haven, have seen their prices rise and yields fall. Today the 10-year U.S. Treasury note reached an all-time low yield of 1.15%. (We started the month with the ten-year note yield at 1.50%.)
Ultimate Impact to Global Economy Unknown
We are in the very early stages of dealing with this pandemic and of course it is not knowable at this point what the ultimate impact on the global economy will be. The coronavirus is not just creating a shock to economic demand, but also to economic supply. The key to how much economic damage is done is by how severely the virus affects consumer behavior, over how wide an area, and for how long. Certainly, the economic effects will be felt differently in different industries. The travel and leisure sector (airlines, cruise lines, etc.), remains most at risk of changes in individuals’ behavior. However, other companies and industries are likely to see no fall off (or even an increase) in business. Amazon and Netflix, for example, are likely to see their businesses strengthen as more people entertain themselves and shop from home.
The Key for Investors
This coronavirus will likely be circulating in the human population for a long time—perhaps permanently. For equity markets to stabilize, investors will, I expect, need to gain confidence that the response to the crisis is suppressing the spread of the disease and/or that methods of treatment are effective. News that could help investor sentiment would include a decline in the number of new cases or meaningful progress on a vaccine. Right now, however, it is likely that the news flow will get worse for the next several months before it gets better.
Same Old Challenge for Investors
While this particular virus is a new type of challenge for equity investors, in another way it is the same old challenge that investors face every couple of years in the markets: what to do during a sudden market decline. For most investors, the best course of action is to take no radical action. Taking action now in an attempt to avoid suffering another leg down may also likely mean missing the recovery, whenever it should come. In the history of U.S. equity markets, all downturns have been subsequently repaired. However, re-entering a market that has already recovered represents a permanent loss of opportunity. It can be unnerving to see how quickly markets can drop, but investors need to keep in mind that recoveries after sharp drops are usually fairly sharp as well. As with other challenges in the past, we will get through this one as well.
As always, I welcome your comments and feedback. Please don’t hesitate to get in touch if you would like to discuss matters in more detail.