Special Release - When Markets Sneeze

February 26, 2020 Glenn Robinson, CFA®, Chief Investment Officer

As of Tuesday’s close, equity markets endured a second day of selling pressure due to concerns over COVID-19, or the coronavirus. While it’s very difficult to assess the global economic impact from COVID-19 at this time, we do know that it is impacting the economy of China and surrounding countries.

We also know from several sources, the majority of infections are isolated to mainland China. According to Investment Strategist Andy Rothman from Matthews Asia, “Deaths due to COVID-19 are highly concentrated in Hubei province, where 95% of all global fatalities have taken place. There have only been 26 deaths outside of mainland China.”

The ramifications for U.S. and European economic growth are less certain at the moment. With the U.S. moving preemptively to shut down travel from China, this should limit the possibility of an outbreak here. We remain cautiously optimistic that the U.S. economy can continue to advance, despite headwinds overseas. The domestic job market remains strong, and wages are rising. This has provided a strong tailwind to consumer confidence, while lower interest rates should allow for a new wave of mortgage refinancing. Manufacturing data has also been improving, and the recent release of the Empire State Manufacturing Survey showed strong, positive momentum. While the impact of COVID-19 to the global economy is unknowable at this time, there is no question it is a human tragedy.

Regarding equities, we view recent weakness as another correction within this bull market. The sell-off began from the all-time highs reached just last week. Sentiment concerning COVID-19 went from contained to anxious after news of the virus spreading to new countries, namely Italy and Iran. Even CNBC jumped on the fear bandwagon, airing their “Markets in Turmoil” special after Monday’s three percent decline in the S&P 500. For reference, after Tuesday’s decline, the index is down 3% for the year, though 12% higher from one-year ago.

With the shift away from risk, bond prices are rising, which reinforces the rationale to hold bonds, even in a low interest rate environment. We expect yields to remain very low in the near-term until the virus situation stabilizes. The next Federal Open Market Committee (“FOMC”) meeting is March 17-18. Currently, futures markets are not forecasting a rate cut at the March meeting, but there are greater odds for a rate cut at the April, June, and July meetings. While rate cuts are not a cure-all elixir, they could help stabilize investor sentiment.

While every portfolio is customized for each client, there are certain biases that we express in every account. One of the main biases we have held over the past ten years, has been a preference for domestic over international stocks, when compared to our benchmark.

We are continuing to monitor the situation as it unfolds, and will make adjustments in your portfolio as deemed necessary. Please contact us if you have any questions regarding your portfolio.

Meet Glenn Robinson, CFA® >>

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