The equity markets tumbled last week on coronavirus fears; despite a late-Friday rally, all of the major indices fell more than 10% last week into correction territory. The worst performer, the Dow Jones Industrial Average, lost a record 3,500+ points (-12.36%), followed by the Russell 2000® Index (-12.04%), the S&P 500® Index (-11.49%) and the Nasdaq (-10.54%). The S&P 500® posted its worst weekly performance since the financial crisis. The decline from the Index’s record high on February 19th to technical correction (a decline of 10% or more from a recent high) was the swiftest on record. The volatility index, the so-called “fear gauge,” rose to its highest level in two years.
The flight to safety drove yields on U.S. Treasuries to new lows; the yield on the 10-year fell over 35 basis points to a record low yield of 1.12%. The yield on the 2-year Treasury fell over 50 basis points this week to drop below 1.00%. The decline reflects emerging expectations that the Federal Reserve, which meets on March 18th, will cut interest rates. Some Fed watchers predict a 90%-100% probability of a 50 basis point cut in March. On Friday, Fed Chairman Powell stated that “the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” He reiterated that the Fed is closely monitoring developments and will "use our tools and act as appropriate to support the economy." Other reports suggest that the White House is looking at tax cuts to offset the possible economic impact of the virus.
While it appears to be a consensus in the financial press that monetary policy would be of no consequence here, we believe it is important and necessary if only to ease financial conditions. The costs of inaction on the part of the Fed are far greater than any action they could take to provide liquidity to the market. While there is no perfect historical analog to the potential impact of the coronavirus on the global economy, we believe the impact of 9/11 can be instructive here – the country’s airline travel and financial markets were completely closed for a week. One of the conclusions from a Congressional Research Service report about the economic impact of 9/11 caught our eye:
There is, of course, the possibility that, but for the timely and decisive action by the Federal Reserve in concert with other major central banks, the effects of 9/11 on both the U.S. and world economies would have been quite different. In this context, it should not be overlooked that markets have powerful mechanisms and incentives to overcome negative shocks.
While it is true that Fed easing won’t solve many of the challenges posed by the virus, it can’t hurt. Given our collective experience in the unintended consequences of financial repression, we understand that the Fed may be reluctant to use a tool when it doesn’t have to. Still, we think it’s important to know that, a little bit like the potential reaction to a bank run, public displays of competence and confidence, plus the passage of time, can greatly limit the long term economic impact of the current crisis. Government agencies and fiscal policy also will have a role to play. Right now, we are estimating that S&P 500 operating earnings for 2020 will be $165, based on an expectation of 1% real GDP growth in the first half. We see support for the S&P 500 at 2,870 and are looking at the prices of copper and gold as well as the shape of the yield curve to give us some indication of when the worst of this crisis for the economy may be over.
The latest reports on the virus (82,000 cases worldwide, 2,800 deaths) suggest that new cases in mainland China have fallen to the lowest levels since January; elsewhere, though, the virus has spread to Mexico, New Zealand and Nigeria. South Korea confirmed more than 594 new cases. The World Health Organization has raised its risk assessment for the virus to “very high.” And, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and a member of the coronavirus task force, said, “This virus has adapted extremely well to the human species. This one has the capability of spreading rapidly from human to human.” He also cautioned that the U.S. does not currently have sufficient testing resources and that a vaccine may not be available for two years.
Market momentum, with seven consecutive days of decline, has clearly reversed course. Fear of the unknown is gripping both the equity and bond markets; policy makers will consider options while a nervous public monitors health updates to assess the point at which they might regain confidence in the market’s direction.
Source: Strategas, Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Sincerely,
Fortem Financial
760-206-8500
team@fortemfin.com
Latest News
Stocks halt slide after decimating week on Wall Street
Stocks have been swooning as investors fret the coronavirus outbreak will derail the global economy
5 parts of the economy most at risk from coronavirus
The growing threat of a coronavirus pandemic is raising fears about the toll it could take on the U.S. economy. Public health officials say the risk
Safe Haven Assets Now Offer A Little Less Protection, Her...
Last week's market decline also bid up the price of certain safe haven assets. Here's how things look today.
