February 27, 2020. By Mark Barry:
After significant selling earlier in the week, global equity markets came under further pressure today as investors grapple with the coronavirus (COVID-19) outbreak and its impact on economic growth. As of this writing, the S&P 500 Index is down -10.7% for the week, while the yield on the US 10-Year Treasury has moved from 1.47% to 1.30%.
While the initial outbreak in China spooked markets, concerns have been amplified by the rapid spread of the coronavirus with new outbreaks in Japan, South Korea, and now Italy. Isolated cases have been identified in many other countries, but yesterday the first US coronavirus case of unknown origin (meaning the patient didn’t travel to a location where the virus is known to be active or knowingly interact with someone who had) was announced, accelerating the selloff.
Prior to the outbreak, investors generally had a relatively optimistic outlook for global growth, expecting a supportive environment for corporate profits and thus equity valuations. The spread of the coronavirus has called this into question, given the disruption to supply chains, productivity, and consumer spending (among others) that will result. While past pandemics like the SARS virus have resulted in somewhat brief hits to economic growth followed by a quick recovery, the impact of the coronavirus remains uncertain given the highly contagious nature of the virus and the fact that global supply chains have become more integrated over time.
It is certainly possible that the coronavirus outbreak and accompanying disruption to economic activity results in a recession (defined as two quarters of negative growth), and at the very least it appears likely that this possibility continues to weigh on markets for a period of time. Although we still expect that the coronavirus outbreak will be reasonably contained in the coming months, we would reiterate that the full and lasting impact of the outbreak remains unclear. Despite this, we would recommend investors stay the course with their target allocations – while the equity markets have and will be negatively affected in the short-term, once the coronavirus is brought under control we believe that the rebound will happen rather quickly as evidenced by past market experiences.
Given that the situation remains very much in flux, we will continue to closely monitor incoming data and newsflow on the coronavirus outbreak as it pertains to the markets and will update you accordingly. And as always, we are happy to discuss any questions/concerns regarding the markets or your portfolio allocations, so please feel free to reach out.