As we expect you are well aware, a great deal of uncertainty is currently on display in the markets as investors grapple with the effects that the spread of the novel coronavirus (COVID-19) may have on the global economy. Investor appetite for risk has largely evaporated as equity markets have now receded somewhere on the order of 10% from their recent highs, while the yield on the 10-year US Treasury note hovers around 1.25% (an all-time low).
Important perspective and context can be drawn from the broader investing circumstances that were in place as 2020 began. A widely-held view among investors (which we shared) centered on the notion that conditions were in place to extend the economic cycle in the US and re-ignite it overseas. Accommodative central banks, the US/China phase one trade deal, mostly expansive macroeconomic data, and a stabilizing corporate earnings landscape supported the constructive view of capital markets held by many as the new year began. The rapidly evolving nature of the coronavirus situation legitimately challenges the integrity of this baseline economic forecast and, at the very least, likely delays the reacceleration of global economic activity. Of particular interest to us (and, we suspect, you) is whether the disruptions incited by authorities in addressing the situation will prove severe enough to curtail global commerce to an extent that fully extinguishes further economic growth. We do not, of course, have the definitive answer to that question today but will be closely monitoring the data and developments on your behalf in the coming weeks.
We thought it might also prove useful to frame prior instances when the global populace has encountered health crises. No doubt, the coronavirus appears to be particularly vexing and challenging to contain and manage (we readily defer to global health experts on such matters), but previous epidemics have tended to have only transitory impacts on capital markets.
Source: Schwab.com, “Spreading Global Virus Cases Shock the Stock Market”, February 24, 2020. https://www.schwab.com/resource-center/insights/section/market-volatility
We fully expect volatility to remain elevated in the markets near-term given the dynamics associated with the coronavirus. Today, our best sense is that the global economy perhaps operates in a “holding pattern” in the coming months, with capital market outcomes ultimately remaining tethered to economic fundamentals.
Volatile periods in the capital markets have rarely proven to be opportune times for investors to make dramatic changes to portfolios, and we would discourage such actions now. We would, however, encourage you to revisit and reaffirm the risk and return objectives in place for your asset pool(s), as bouts of market stress have a way of crystalizing and clarifying investors’ larger intentions. Your consultant or wealth advisor stands ready to assist you in this evaluation.