Audio Transcription – 2.25.2020 Market Update – Coronavirus Impact
Volatility and negative markets are definitely back. Volatility, as measured by the VIX Index, has increased from 15 to over 28 in the last few days, with the equity markets being off 7½ to 8% from their market highs. We had anticipated, and actually appreciate, having this pullback. We weren't sure what was going to trigger it but as we looked at it, we knew the market was getting a little ahead of itself as it kept reaching new highs through January and February. It had gone up straight from October and was up over 15% as measured in the S&P 500 before starting its pullback. We weren't sure what was going to trigger that, but the coronavirus is one of the things that popped out and we thought that maybe that would have happened a couple weeks ago, but it’s actually now, after two or three weeks, it's actually been a trigger and is throwing fear into the market. The market was overbought. We're now getting into parts of the market where we may be closer to oversold but nothing can say that we're not going further. We did break through some major technical levels in the last couple of days that would lead us to believe that we could go lower yet from here, but we don't see this as the beginning of a bear market. The coronavirus has just triggered this thing with concerns about the economic impact from it.
There’s definitely going to be supply chain issues as we look down the path and see that the number of shipments that are coming from China have declined pretty dramatically over the last month with the economy basically being shut down and manufacturers shut in China. Global growth will be impacted. We’ll see slower growth in the first and second quarters most definitely in China and probably through most of the other economies and possibly even in the U.S. The U.S. will probably see more of it in the second quarter as the supply chain issues come through and there may not be enough inventory to help build and service the areas that are dependent on products that come from China. The other thing that’s happened has been a definite flight-to-quality with the flight into Treasuries. The 10-year Treasury now standing at around a 1.30-1.32% level which is near all-time lows and the 2-year Treasury in the 1.10s. These are extremely low levels of rates.
What we've also seen is an inversion of the curve which we’ve talked about before, where the 3-month is yielding more than the 10-year Treasury and that has often been a precursor to a recession. What it may do is take the Fed off of the sidelines and lead them to make a 25 basis-point cut in the next month or so. They will be continuously watching the growth pattern though for what's going on with the impact of the coronavirus. I think what really impacted the markets today was the CDC coming out and telling people to prepare for a pandemic, even though they’ve stepped back and said we don't see a pandemic happening at this point, but we always have to be aware that it could happen and we have to know what to do in the event of it.
This uncertainty is always hard and it's hard to quantify what impact it’s going to have and this has led the market to have that fear and the sharp move down in the last 2 days. While this is not normal to drop close to 2,000 points in two days and it is the largest percentage drops two days back-to-back that we’ve seen since 2008, we don't see it as a 2008 environment. What we do see it as a normal correction in a continued bull market but we will continue to monitor it. We do not react to these types of moves. We are long-term investors. There will be an opportunity here where we may want to enter the market but at this point we are going to be just sitting here and waiting, seeing what the outcome is and hold the course. We are long-term investors and we do not want to bring the emotions into it and make rash judgments. With that, we will stay the course and we hope our clients feel secure in what we are doing and how we're managing their portfolios.
Betsy Pierson, CFA
Chief Investment Officer