Markets continued their tumult this week, with an initial rebound from last week’s crash facing on-again, off-again selling as investors struggle to see how deep the impact may be from the spreading Coronavirus outbreak. The flight to safety continued, pushing bond yields to all-time lows, with 10-year Treasury rates below 1%. In response to the crisis, the Group of 7, the intergovernmental economic organization consisting of the 7 most advanced economies, had an emergency call to determine what steps were necessary to blunt the effects from the crisis. Hours later, the Federal Reserve took emergency action and cut rates by .5%, a move not made since the 2008 financial crisis. Other central banks also pledged support, and will be taking appropriate measures on a case-by-case basis.
The Coronavirus continues to plague the global economy, with corporate profit projections falling, consumers facing quarantines, companies unable to restore supply chains, and policymakers and the general public questioning what the future holds. There is no doubt now that the virus is having significant effects on global output, and there is every expectation that the next several quarters will see a major slowdown, if not an outright contraction in growth. Fear itself has taken hold and markets have panicked, though the overwhelming majority of investors believe this to be a temporary dislocation. The Fed’s actions Tuesday did little to settle market nerves, as many saw the act as one of desperation, and one that will have little effect on preventing pain to the real economy. In addition to the virus concerns, many believe the election jitters are beginning to unfold in markets, with the outcome of Super Tuesday in favor of a more moderate candidate rallying markets significantly. With the Presidential election roughly 8 months away, markets must digest the probabilities for each candidate all while maintaining an eye on the ever-growing epidemic. On a positive note, the rush to purchase government bonds has pushed borrowing costs to record lows, boosting the prospects for the housing market, as well as making the case for equities significantly stronger. As it stands today, the dividend yield on the S&P 500 is more than double that of 1- year government debt, moving the risk/reward trade off significantly more in favor of owning stocks today.
We have been patiently riding out this week’s market moves, expecting more volatility ahead as risk assets try to form a bottom. With news pouring in every hour rocking markets, we believe there is likely additional pain ahead for investors. However, we maintain that while there could be severe short-term disruptions on both the supply and demand side of the economy, that fundamentals should be robust enough to see through this event, and that policymakers will act to prevent a further deterioration in growth. For now, production figures, employment, and confidence are remaining steady enough to keep the bull market intact. The cash we have raised is ready to be deployed, and we look forward to taking advantage of lower prices in what had been a relatively expensive marketplace. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.