Investment Perspective: As Coronavirus Spreads, Wash Your Hands and Prepare for More Volatility
Weakness during the latter weeks of February continued into the first week of March. Fears over COVID-19 (also known as coronavirus) continued to rise as more cases were reported globally. Investors, faced with a high level of uncertainty, sought safety. This continued to have a profound impact on capital markets, which saw a selloff in risk assets and a rush into safety.
The impact on the economy and, ultimately, on corporate earnings is currently unknown. During the week, data pointed to sharp contractions in manufacturing activity across Asia-Pacific countries, most notably China. A key uncertainty is how supply-chain disruptions will impact global growth at a time when business investment has already been lackluster.
In addition to grappling with the uncertainty from this supply shock, investors must also consider the magnitude of what most certainly will be a demand shock. Personal consumption could potentially be sharply hampered.
Markets have punished airline stocks on expectations that business and personal travel will suffer. Anecdotally, a number of high-profile investor conferences were canceled in the last two weeks or are being offered via webcast to accommodate those who wish to avoid travel.
The VIX, widely known as the “fear gauge,” spiked up to just over 50.0, a level not seen since the aftermath of the Lehman Brothers bankruptcy in September 2008. Equity markets attempted at times during the week of March 2nd to rally. For example, the S&P 500 rose 5.3% before closing down almost 4% on Friday. Equity markets across Europe and Asia exhibited similar behavior.
One of the more remarkable moves, which happened days after the Federal Reserve’s extraordinary inter-meeting rate cut of 50 bps, occurred in the rate markets. The 10-year Treasury fell from 1.08% at the beginning of the week to 0.79% on Friday. The 30-year Treasury was yielding 1.31% that day as well, less than the 1.34% yield of three-month Treasuries on Monday. (Three-month Treasuries had traded down to 0.45% by Friday.)
The 10-year Treasury’s dip to below 1% garnered most of the attention for sovereign debt market watchers. However, declines during the week also occurred in Germany (–9 bps to –0.71%), Canada
(–37 bps to 0.75%), and the U.K. (–19 bps to 0.23%).
Credit markets had largely held up earlier in the week, but Bloomberg reported that spreads widened on Friday amid a challenging trading environment. The continued plunge in oil prices affected high-yield energy credits with spreads at nearly 1,000 bps at March 5th, bringing the year-to-date widening to 296 bps.
As we communicated in our recent Investment Perspective, Markets React to Coronavirus Outbreak, we continue to encourage clients to maintain an even hand and steady course.
Historically, the best investment opportunities can often be found in the most uncomfortable market environments. We firmly believe that the best tool to combat the volatility seen over the past few weeks is diversification in concert with a dedicated rebalancing strategy.