The Spread of a Pandemic
Markets retreated this week as the novel coronavirus Covid-19 was declared a pandemic on Wednesday by the World Health Organization. Further shocking markets was the emerging dispute between Saudi Arabia and Russia, as both countries have vowed to flood the oil market with cheap inventory until the opposing party agrees to terms. No sector was spared from the decline as fear spread globally. Technology led the S&P sectors this week with the smallest losses, finishing ahead of healthcare and communications to round out the strongest sectors. Markets have officially entered bear market territory resulting from developments regarding the spread of the coronavirus, as new cases have continued emerging around the globe. Public anxiety is growing as the virus continues to spread, adding pressure to markets and global supply chains as both consumers and workers are staying home. Investors have faced challenges trying to determine market impact, as governments are increasingly shutting down businesses and public events to help stem the spread.
European indices declined sharply this week, with all major indices returning negative results. Japanese equities also returned negative performance, continuing last week’s trend. New cases of the coronavirus have been growing at increasing rates in Europe, causing elevated volatility and increased selling pressure on assets.
Markets fell dramatically this week, with all major equity indices bringing in negative returns. Fears concerning global stability and health are an unexpected factor in asset values, and the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks were struggling to gain traction last month, other asset classes such as gold, REITs, and US Treasury bonds proved to be more stable. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
U.S. value stocks have been hit especially hard by the market downturn. Since the outbreak of the Covid-19 coronavirus, value stocks have declined at increased rates. Value stocks typically outperform growth stocks during times of crisis, making the divergence unexpected.
Broad market equity indices finished the week down, with major large cap indices outperforming small cap. Recent fears weighed heavily on equities this week, as prices declined in response to virus developments. A positive U.S. consumer sentiment report was unable to bolster U.S. markets in the face of global economic health concerns.
S&P sectors returned sharply negative results this week, as broad market movements showed investors moving to reduce risk. Technology and healthcare led the best performing negative sectors returning -5.20% and -6.65% respectively. Energy and utilities fell the most, losing -24.28% and -14.26% respectively. Technology lead the pack so far YTD, returning -8.33% in 2020.
Commodities dropped this week, driven by further dramatic losses in oil. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Global fears surrounding the virus outbreak have further stoked demand concerns, as a significant impact on energy demand is expected as a result. Additional pressure has been added to oil markets as Saudi Arabia and Russia have entered into a price war over production disputes.
Gold fell this week as fear surrounding the coronavirus increased. Gold is a common “safe haven” asset, typically rising during times of market stress, but broke from traditional price movements this week. Focus for gold has shifted to global macroeconomics and public health concerns, as geopolitical tensions seem to be fading from investor focus.
Yields on 10-year Treasuries rebounded considerably to 0.96% from 0.76% while traditional bond indices fell. Treasury yields rose in spite of virus fears as investors try to protect against increasing risk. The 10-2 year yield spreads loosened. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds dropped this week, but spreads still tightened from rising treasury yields. High-yield bonds are likely to remain volatile in the short to intermediate term as the Fed has adopted a more accommodative monetary stance and investors flee virus risk factors, likely driving increased volatility.
Lesson to be Learned
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 25.18, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 0% bullish – 100% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market decreases in the near term (within the next 18 months).
The Week Ahead
Global governments have begun shutting borders and restricting economic activity, likely driving increased volatility. We expect large price swings as markets continue to process developments surrounding the coronavirus. The economic calendar is light this week, with retail sales being the only high impact releases scheduled.