Impromptu Market Update – February 2020
We are standing beside you today, and we’re looking ahead towards tomorrow’s challenges and opportunities. Our goal is to keep you well informed about what’s happening in the markets so you’re more in control of your financial future. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, if you have questions or concerns, don’t hesitate to contact us.
The Coronavirus outbreak continues to hit the headlines, which has caused fears to grow over the weekend and in the early part of this week. For investors, the outbreak has sparked some disturbing imagery across news outlets and social media around grocery stores in Milan with nearly bare shelves, as local fears rise. Further, in the week prior, Apple issued a revenue warning related to the outbreak and concerns over supply chains and labor shortages, and Bloomberg is estimating that the Chinese economy is operating at roughly half of its regular capacity. Here in America, the CDC has issued a warning that the outbreak could spread to our country as well and that we should be prepared if that were to happen.
At the close of the market on Tuesday the market was down -6.26% for the week, and down -2.90% since news of the outbreak started. We saw all-time highs in February and are down 7.6% off those highs, mainly due to this week’s movement. The market is quickly pricing in concerns over the lack of containment over the weekend and could soon snap back on positive news regarding containment or if/when a vaccine or other treatment has been found and put into production.
Modern outbreaks, very real and poignant human tragedies, have typically had minor impacts on capital markets. We looked at several major outbreaks over the last few decades and failed to find any long-term impact (and in some cases, even short-term impacts) in equity markets and the ability for companies and economies to recover and return to growth. An updated chart of that research through the close of yesterday is below.
That said, each of these cases is unique in terms of the severity, location, transmission, and other aspects of a given outbreak. We are not epidemiology experts and certainly can’t predict what may happen next, but feel it is important to level set where we are today and provide context and detail into what we are seeing.
Why is it important?
As travel warnings and restrictions are put into place, and more areas of quarantine are declared, there can be a genuine impact on supply chains and output in our world of intricate and expansive supply chains. We have seen glimmers of this, and these events may put a damper in Q1 growth as well as introduce a bought of uncertainty and volatility into markets. We have already seen some increased volatility expectations as well as declining interest rates in an initial flight to safety.
What do we think about its potential impacts?
Looking at fed funds futures, odds of further Fed action have grown substantially recently with the chance of at least one rate cut by the April meeting hitting over 50%. As recently as a few weeks ago, these odds were under 20% and in the single digits before that.
The knee-jerk flight to safety has depressed interest rates further, and they currently stand at some of the lowest levels ever seen on long-dated Treasuries. As the yield curve continues to flatten, we could very well see it invert once again and spark increased chatter of recession. Today, the 10-year yield remains just modestly above the 2-year, though the 3- and 5-year has fallen below the 2-year yield.
In other news impacting capital markets, Sen. Bernie Sanders has taken the lead in the democratic primary and, based on today’s poll numbers, appears the clear front runner to win the nomination. While a lot can still change, and regardless of one’s political leanings, if his lead holds through Super Tuesday and beyond, we should expect some additional volatility around fears of increased taxation and regulation.
In short, we don’t know what lies ahead. We know governments are rallying resources to address this issue as well as coordinate responses as best they can. There have been some small-scale travel warnings and restrictions put in place, but these may very well be temporary. The situation may get worse before it gets better, but the data set, as it stands today, does not support the idea of widespread disruptions or longterm impacts of the outbreak.
We will continue to monitor the situation closely and assess the underlying data and be proactive in our communication with you. We believe staying unemotional during these times is the best course of action. Avoiding knee-jerk reactions and continuing to focus on the data are the best tools we have available in situations like these.
This commentary reflects the personal opinions, viewpoints and analyses of Traverse Planning and the Clear Creek Financial Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Traverse Planning and Clear Creek Financial Management, LLC or performance returns of any Traverse Planning and Clear Creek Financial Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this analysis constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Clear Creek Financial Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects the reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index. The Russell 2000 is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States The MSCI World Index captures large and mid-cap representation across 23 Developed Market (DM) countries. With 1,653 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.