As the coronavirus outbreak continued to spread far beyond Chinese borders this week, financial markets reacted in kind, with frightened investors repricing global growth expectations and exiting positions, causing stocks to plummet.

With the first confirmed case of coronavirus reported in South America on February 26th, the coronavirus outbreak had spread to six of the world’s seven continents.  As of that date, the World Health Organization reported approximately 81,000 confirmed cases, 2,700 of which had resulted in death.  The vast majority of cases have been centralized in mainland China.  However, with more confirmed cases being reported across the globe this week―particularly in Europe―concerns have become more widespread, particularly after the Center for Disease Control cautioned about the potential impact in the United States.

The Markets

The two-day period of February 24th and 25th was the worst two-day slump for the Dow Jones industrial average in four years, dropping 1,910 points before rebounding slightly on the 26th.  Since the city of Wuhan, China was quarantined on January 23rd, the S&P 500 fell 6.1% through February 26th, while stark declines were also experienced in London’s FTSE 100 Index (−5.9%) and Japan’s Nikkei 225 Index (−5.8%).

China’s local equity markets have been surprisingly resilient.  Chinese policy makers have taken a number of measures over the past month to boost investor confidence and bolster its financial markets.  Neighboring countries, such as Thailand and Indonesia, have followed suit by lowering rates in an effort to dampen market impact from the outbreak.

High quality hedges in the fixed income space have helped insulate portfolios from dislocations within the growth engine.  Last week, yields on the 30-year (1.80%) and 10-year (1.31%) U.S. Treasuries fell to all-time lows amid the flight to safety, lifting bond prices.

Analysis and Looking Ahead

While the spread of this serious global health threat is frightening and the devastation to families and communities are top of mind, we encourage clients to maintain an even hand and steady course.

Unfortunately, there have been several instances of widespread health scares over the last 20 years.  For each instance, we have assessed the ensuing U.S. equity drawdown, as well as the performance of other major asset classes during the U.S. equity sell-off.  Our analysis shows the initial market reaction has sometimes been severe and widespread, but the disruptions have proven to be brief and high quality fixed income has provided some stability to portfolio structures.

 

All commentary contained within is the opinion of Prime Buchholz and is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer, to buy or sell securities.  The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.
Information obtained from third-party sources is believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified.  Performance returns are provided by third-party data sources.
Past performance is not an indication of future results.