Summary
- Last week, the S&P 500 experienced its largest decline since the banking crisis of 2008-2009 with outflows from stocks migrating to haven assets like bonds and gold.
- Though the American consumer and U.S. economy still have a number of fundamental strengths, the unprecedented nature of the virus's potential economic impact are likely to create a prolonged, difficult period of upside and downside volatility over the next few months.
- We believe the market reaction to these realities will be relatively brief, regardless of how severe. We still do not anticipate the U.S. is heading toward a recession.
Market Outlook
The coronavirus (COVID-19) has been roiling the financial markets since late January when it arrived on the radar screens of investors around the world. Last week, the S&P 500 experienced its largest decline since the banking crisis of 2008-2009. On February 19th stocks were at record highs, by Friday the 28th, U.S. stocks were down more than 10% from those high levels and down 8.6% overall for 2020. When money exited stock markets, there was a "flight to safety" into bonds, with the 10-Year U.S. Treasury yields falling to a record low level of 1.08%. As with bonds, gold has also appreciated in value this year with investors focusing on "safe haven" alternatives to stocks. Today, the U.S. Federal Reserve cut interest rates .5%, in an emergency move amid the spreading virus. This was the first inter-meeting cut since 2008. Presently the markets are expecting an additional .25% rate cut by this summer.
Despite yesterday's rebound in stock markets, we believe global markets will be enduring a prolonged, difficult period of upside and downside volatility over the next few months. Excluding geo-political wars, locking down large portions of the world because of a virus is unprecedented. As the virus spreads to other geographic regions, less autocratic governments may have a challenging time containing it. The U.S. is beginning to feel some impact in the American economy. Auspiciously, the manufacturing and housing portions of our economy had begun to strengthen in the months before COVID-19 became news.
The outlook remains uncertain as travel restrictions, business closures and quarantines are increasing. Although China is beginning to reopen some portions of their economy, the markets will certainly continue getting buffeted from the news of the day. As the virus hits the U.S. more substantially, businesses, consumers and investors could be prone to more panic in the short term. We believe the market reaction to these realities will be relatively brief, regardless of how severe. The American consumer and U. S. economy still has several fundamental strengths, with unemployment remaining at 50-year low levels.
We do not anticipate the U.S. is heading toward a recession. Although the fear-driven sell-off may have been an overreaction, as it usually is, we will certainly have more market gyrations in our future. Fortunately, our clients' financial plans and well-diversified investments are built to weather this storm.