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Coronavirus and the Markets – February 26, 2020

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Stocks fell sharply on Monday and dropped again Tuesday as concerns about the coronavirus (COVID-19) pushed markets significantly lower. An optimistic view of how well the virus was being contained has given way to a number of negative data points in recent days.

  • According to the World Health Organization’s latest report, released Wednesday, February 26: The number of confirmed cases in South Korea grew from 31 on February 18 to more than 1,200 on February 26.
  • Confirmed cases in Italy began skyrocketing on February 21 and now stand at 322, with 11 deaths.
  • Iran reports 15 deaths, but 95 confirmed cases – compared to other countries, that ratio suggests significant underreporting in Iran.

There were also reports suggesting the incubation period for the disease and the risk of carriers showing no symptoms will make the virus harder to contain.

Despite the surge in cases, the World Health Organization has held back declaring the virus a pandemic. Officials with the federal Centers for Disease Control and Prevention are warning the disease will spread and that it’s likely this virus will cause a pandemic.

Markets reacted sharply to the news. Over the last four trading days, the S&P 500 has dropped 7.6%. The declines on Monday and Tuesday turned the index negative for the year. The 10-year Treasury bond’s yield dropped to 1.33% as concerns over slowing economic growth caused investors to take shelter in safer assets. The CBOE VIX, known as the “market fear gauge,” hit the highest level since late 2018.

Stock markets had been in rally mode since the beginning of February as investors’ concerns about the virus abated for several weeks. New case growth had slowed, and more workers were returning to their jobs. The S&P 500 hit an all-time high as recently as Feb. 19, before dropping the rest of last week.

The spread of the disease to new countries raises the potential risk to global economic growth and corporate earnings. In the short run, both demand and supply for goods and services are being affected. Demand is being curtailed as people cancel travel, minimize trips out and take other steps to reduce the risk of contracting the virus. As factories tell workers to stay home, key elements of the global supply chain reduce or eliminate production to protect employees. Firms downstream in the supply chain are forced to reduce production from lack of supply, affecting additional firms.

The long-run effects represent a more challenging unknown. The virus may delay a recovery in manufacturing and business spending. If the virus returns next winter, similarly to the flu, it could reduce demand for travel. To combat the risk of viruses, global manufacturers will likely source material from a wider geographic area, so additional outbreaks will have a lesser effect on the ability to produce goods.

We will continue to monitor portfolios and markets as the crisis continues and hopefully ends. As we wrestle with the human costs and their financial consequences, there are four key points to keep in mind:

  • Markets react swiftly to new information. This means investors should prepare themselves for big swings in the market in either direction.
  • The longer the crisis lasts, the greater the impact. We are watching closely for reports of financial difficulties in companies not capitalized for a long period of reduced sales.
  • Governments and central banks will likely step in to prevent particular financial difficulties from spreading throughout the economy. Central banks can cut rates and infuse banks with cash. Governments can adjust laws and rules to prevent bankruptcies related to the virus.
  • Historically, viruses run their course, and much of the lost production and consumption bounces back. First, the disease must be controlled.

Lastly, as the market swings higher or lower, remember to think about your portfolio in percentages rather than points or dollars. One-thousand-point moves in the Dow Jones Industrial Average aren’t as big a deal as they were when the index was at half its current level. After more than a 30% increase in the S&P 500 last year, investors should keep a 7-10% decline in proper perspective. Consult with us before you make any big changes. We can help you assess your portfolio and guide you through these uncertain times.

Sources:
https://www.cnbc.com/2020/02/25/us-health-officials-say-coronavirus-will-likely-cause-a-global-pandemic.html

https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200225-sitrep-36-covid-19.pdf?sfvrsn=2791b4e0_2

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

https://finance.yahoo.com/quote/%5EVIX?p=%5EVIX

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