CORONAVIRUS AND THE MARKETS PART 2
By John Guarino in Trusted Advice
By now, everyone is overwhelmed with coronavirus information. With the airwaves, TV and internet providing round the clock coverage of the pandemic, we can offer little in the way of new insights on the virus and its rapid spread in the U.S. and globally. Many of us have experienced various types of financial crises during our lives. We have seen presidential assassinations, wars and terror attacks. And we have even encountered other disease epidemics such as MERS, SARS and the Swine flu. Not since the Spanish flu in 1918 has fear of the spread of disease been so great. Extraordinary measures such as mass quarantines of countries or localities, forced school and restaurant closings, mandated teleworking and telelearning, the postponements or cancellation of events and large gatherings are being implemented in an effort to mitigate the spread of the virus.
Some elements of societal, governmental and financial markets reaction to the crisis are reminiscent of the aftermath of 9/11 and others of the financial crisis in 2008-2009. Planes were grounded and air-traffic restrictions were imposed after 9/11. The stock market was closed for a week after the attacks as well. The extreme volatility and unprecedented decline in stock prices has similarities to the behavior of markets during the financial crisis. Besides the stock market crash on October 19, 1987, we have never witnessed the speed in which stock prices collapsed as they have over the past two weeks. With many of the normal activities of society shutting down for an indefinite period, the global economy is sure to suffer material harm. Because it is hard to estimate the length and severity of the economic damage at this time, financial markets are reacting to the uncertainty by aggressively reducing risk assets and investing the proceeds in safe assets like U.S. Treasury securities and gold. Yields on longer dated U.S. Treasuries plummeted to record low levels last week with the 10 year note yield dropping to 0.31% at one point. The speed with which stock prices dropped likely triggered massive margin calls and forced selling, resulting in the March 12 drop of nearly 10% across major U.S. equity indexes. The next day, stocks recovered nearly all of these losses. Unfortunately, the Federal Reserve Bank's "emergency" rate cut to 0% on Sunday alarmed investors and led to a collapse of 13% in major stock indexes, testing the December 2018 lows. We fully expect markets to remain extraordinarily volatile in the weeks ahead as investors grapple with all of the uncertainty and economic dislocation. During the financial crisis, markets eventually stabilized once appropriate monetary and fiscal policy responses were put in place. In the present crisis, we believe appropriate fiscal and monetary policy responses will occur much faster. However, it is clear that many countries have been unprepared for a health crisis of this magnitude. Therefore, in addition to fiscal and monetary policy, investors are closely monitoring public health policy responses. We expect markets to stabilize once investors believe policies are appropriate to handle the crisis. We also expect markets to recover, perhaps sharply, once the number of new cases of coronavirus has peaked. Many experts believe the peak in new cases may be in mid-late April. Just prior to the coronavirus shock, the U.S. economy appeared to be poised for an acceleration in economic growth as new trade deals with China and North American trading partners were signed earlier this year. It is therefore reasonable to expect a rapid economic recovery to begin when society returns to normal.
In the midst of the economic turmoil caused by the coronavirus threat, Russia and Saudi Arabia decided this would be a good time to have a split over previously agreed upon oil production levels. The Saudis proposed reducing the supply in order to stabilize oil prices during the coronavirus-spurred global economic dislocation. The Russians wanted to maintain production levels, believing lower prices could drive many U.S. shale oil producers out of business. When the dispute couldn’t be settled, the Saudis reversed course and announced they would be increasing oil production. That announcement caused oil prices to collapse by 40%. The effect of this sharp decline in oil prices may hurt the U.S. economy a bit in the short-term, as U.S. energy companies’ revenues, earnings and employment deteriorate. Inevitably, lower oil prices will benefit the U.S. economy as consumer and business expenditures on oil and gas drop, leaving more disposable income to be spent on other products and services.
Over the past two years, we have made a concerted effort to communicate the need for clients to reduce risk by eliminating debts, making sure they had access to adequate cash reserves, and diversifying some assets into FDIC-insured market-linked certificates of deposit (CDs), where appropriate. All of these efforts were intended to prevent clients from needing to liquidate securities at depressed levels during a market downturn. With the downturn upon us, we believe these efforts should have the intended effect, allowing clients to largely ride through the disruption and chaos caused by the coronavirus. Hopefully, this downturn will be short-lived. But please know, we stand prepared to guide our clients through any environment that presents itself.
Just as societies have adapted to deal with past financial and security threats, we are confident that ours will adapt to the threat imposed by the rapid spread of contagious diseases. Unfortunately, civilizations are often unaware of vulnerabilities that exist until a crisis occurs. Advancements in medical research, technology and communications have placed the world in a far better place to deal with the current pandemic than the one that took the lives of an estimated 50 million people during the Spanish flu 100 years ago (before the development of antibiotic and antiviral drugs). Crises tend to unify people around a common cause. Hopefully, the current crisis will draw us (metaphorically) closer together, even as we practice social distancing and self-quarantining. In the aftermath of 9/11, the world became more aware and better prepared for terror threats. After the 2008-2009 financial crisis, the global financial system was recapitalized, and through better regulation, financial security was improved. Ultimately, the lessons learned from the coronavirus pandemic will likely result in better preparedness and tools to deal with future health threats.
We wish to assure all of our clients that everyone at Covenant is working diligently on your behalf. As people of faith, we are committed to pray for the health, protection and financial security of all of our clients during this health crisis. We will abide by public health recommendations to avoid face to face meetings until the crisis has passed. We are always available for voice or video calls to discuss the economic and investment implications of the pandemic. During times of extreme anxiety, we will do our utmost to provide rational perspective drawn from our own study and direct experience of other crises. During periods of extreme volatility an experienced financial advisor can offer the most value by differentiating between opportunities and risks.
Rather than the usual array of charts, we leave you with the following to add some levity to an otherwise gloomy subject. Please know we are here for you and available at any time should you need assistance during the period ahead.