Coronavirus fear gripped markets, sending stocks rapidly into correction territory. A more detailed summary of our view is below. In other news, Bernie Sanders strengthened his status as front-runner for the Democratic nomination following an adequate debate performance.
S&P 500: 2,954 (-11.5%)
FTSE All-World ex-US (VEU): (-8.1%)
US 10 Year Treasury Yield: 1.17% (-0.29)
Gold: $1,580 (-3.8%)
EUR/USD: $1.103 (+1.7%)
- Monday – Drug maker Moderna shipped a batch of coronavirus vaccine to the government for testing. Clinical trial results could be available by summertime.
- Tuesday – The ten-year Treasury yield hit a record low of 1.32%.
- Tuesday – Bernie Sanders appeared to strengthen his front-runner position after a primary debate.
- Tuesday – China took the first steps to implement the phase one trade deal, lifting import restrictions on US farm goods.
- Tuesday – The CDC said it expects a wider spread of coronavirus in the US and warned of potential disruption to daily life.
- Wednesday – President Trump conducted a press conference and downplayed the risk of coronavirus.
- Thursday – The S&P 500 fell 4.4%, pushing stocks into correction territory.
- Friday – Fed Chair Jerome Powell said the central bank is prepared to cut interest rates if necessary to sustain growth if the coronavirus causes significant disruption.
Markets declined sharply this week as it became more apparent the coronavirus is likely to spread throughout the world, potentially causing significant but likely temporary disruptions to daily life. Very importantly, however, the number of reported active cases in China has been steadily declining for about a week now, with official numbers down about 25% from the peak.
This is consistent with similar outbreaks and provides strong reason for optimism this coronavirus will follow a pattern of peaking within a few months of initial spread in any given area. The trend may temporarily reverse as restrictions are lifted but would be incredibly good news if it persists next month. To date, the reported infection rate in China overall has been 0.006% of the total population.
The correction in stocks has been swift, the fastest ever 10% decline from a record high. US stocks are now back at levels seen about five months ago. Meanwhile, global stock prices are modestly lower than two years ago. Diversified Personal Capital managed portfolios are generally up over this same two year time period due to dividends as well as gains in bonds and alternatives.
All of this is relevant because once panic subsides and damage is assessed, fundamentals will again matter. Global stocks have an expected forward Price to Earnings of about 15 and a dividend yield of a little over 2.5%. Given all-time low Treasury rates, stocks are expected to remain attractive on an earnings yield basis, which is encouraging deep in a bull market.
In times of euphoria or panic, stocks tend to overshoot in both directions, which is why a stable approach with periodic rebalancing can help. There is no way to know where or when this sell-off will find a bottom. It may seem hard to imagine, but there is also short-term upside potential as well as further downside potential. It can feel obvious that stocks will decline if restrictions are placed on gatherings, school or travel. Thinking globally, this is already reality. If we get to that point in the U.S., it could be concurrent with a decline in transmission and new cases like we’re starting to see in China.
We understand it is difficult to think long-term in the face of rapid declines, especially with simultaneous concern about safety and our loved ones. Our job as advisors is to remain unemotional and strive to do the right thing to help our clients achieve their financial goals. Generally, that means striving to identify an appropriate long-term allocation, being disciplined about doing the little things that add value along the way and communicating with you directly. Deviating from a disciplined approach can open the window for mistakes and poor results.
As always, if we see a situation where we have a strong conviction that the fundamental risk/reward of a security or asset allocation no longer makes sense, we will consider alternatives and act accordingly. Currently, this is not the case. We will look to capture tax loss harvesting opportunities in taxable accounts where they are available. There may also be some rebalancing of accounts, but these will be relatively minor as current allocation overall remains reasonably close to strategic targets.
Please be in contact if you wish to discuss our views on current events, or anything in your financial life. We wish you a great weekend.