Stock investors have had a rude awakening this week as stocks have plummeted the past two days due to concerns about the spread of the coronavirus. What started out as a China problem is now a global problem as reported cases and deaths have spread to other countries. Some sobering comments by the U.S. Centers for Disease Control and Prevention about the risks to our country likely contributed to today’s sell-off.
As stocks have tanked, bonds have rallied, pushing the yield on U.S. Treasuries to all time lows. It is pretty incredible that the yield on the 10 year Treasury is now just 1.33% and on the 30 year Treasury 1.80%. If anybody is regretting not refinancing their home on a previous drop in interest rates, they now have
another opportunity. The financial markets are showing increased odds that the Federal Reserve will again ride to the rescue and cut interest rates. At this point, I believe it would be premature for the Fed to make any changes in their policy, especially with unemployment near historic lows and some inflation measures not being as benign as the Fed’s preferred gauge.
As I noted in my market update letter last month, stocks seemed ripe for at least a pause in their ascent. What is always unknown is what the catalyst will be for the pause or reversal. Any event that impacts the consumption of goods or the production of goods in either the U.S. or China (the twin engines of the global economy) is likely to have an impact on global economic growth and corporate profits. If profits are impacted, stock prices are likely to be impacted as well. If history is prelude, I expect the financial market impact of the virus to be short lived assuming the virus’ spread does not become significantly more widespread. I believe the most likely scenario is a two-quarter impact to GDP growth and corporate earnings.
I have had inquiries from a couple of clients asking if we should be getting more aggressive in portfolios following yesterday’s sell-off. I believe it is premature to do so for several reasons: The magnitude of the sell-off is still not that severe, not yet qualifying as a “correction” (10% pullback from highs); while the number of reported cases in China is falling, the virus’ spread may still be in the early innings; sentiment is still not fully pessimistic; and market bottoms typically take awhile to play out. In the meantime, we can take solace knowing our managed account clients’ portfolios are already allocated with the expectation that we will have volatility such as this.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President