Coronavirus and the Market

Coronavirus and the Market

 

The sudden explosion in concern regarding the spread of the coronavirus has played a major part in the stock market’s weekly drop, and that accelerated on Thursday when a spokesperson from the CDC said it was a question of “If, not when,” we see the disease spread to U.S. communities. The coronavirus’s impact on the markets (and economy) MAY be entering a new, more significant phase, because of the risk of introducing fear into the economy, and that can essentially become a self-fulfilling prophecy that creates a slowdown (people don’t go out for fear of the coronavirus, and the U.S. and world economy slows materially).

 

However, looking forward, whether today marks the end of this pullback (and if it is the end, the decline will be in a very normal annual 10% correction range) or we continue to trade side-ways to down, we have been actively defensive in our portfolios since January, holding over-weights in treasuries, utilities and gold which are hitting all-time highs as the equity markets are pulling back mitigating much of the losses in this down week.

 

As we wrote in our third and fourth quarter 2019 commentaries:

 

“…we continue to maintain a more defensive “watch and see” asset allocation which has performed admirably both for the quarter and past year.”

 

Clearly, downside risks to this market are building, especially if the spread of coronavirus becomes a direct headwind on the U.S. economy. But to consider coronavirus a bearish gamechanger, we must believe that the economic impact will last several quarters, and we just don’t see the facts to make that determination yet.

Again, we are not trying to downplay bad news, but we do also want to point out progress to ensure balance. Case in point, Chinese markets rallied overnight because factories are coming back online in China. For perspective, about 78k people in China are sick, but the population is over 1 billion and the vast majority of citizens are just waiting for an “all clear” to resume normal life.

This virus, like others in the past will eventually pass, but the magnitude of the slowdown is yet to be determined so we will continue to monitor this situation and adjust portfolios accordingly.

 

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