MARKET UPDATE: Coronavirus Market Impact

CONCERNS OVER COVID-19 AND ECONOMIC DOWNTURN

The coronavirus outbreak, recently declared a global pandemic, continues to dominate headlines. As of Sunday evening in the US (March 15th), confirmed global cases of the virus (officially COVID-19) had topped 167,000 and claimed more than 6,400 lives.

In the US, the focus has intensified on “flattening” the peak of the virus, with actions including event cancellations, limits on the size of public gatherings, school closures, implementation of remote work models and a push to improve inadequate testing. Developments in China and South Korea, meanwhile, are improving. Wuhan, the epicenter of COVID-19, reported just a handful of new cases for a second straight day—and there were no new infections elsewhere in China. South Korea reported more COVID-19 recoveries than new cases for the first time. However, other parts of the world are worsening, including the US and Europe.

As concerns have grown about the virus and the potential economic damage it could cause, global stocks have declined by around 20% year-to-date. However, viewed over a longer historical time frame, equity markets are still up ~20% (cumulatively) since early 2015 (a 3.8% annualized gain).

Over time, stocks are valued based on earnings and cash flow, and history makes it clear that this relationship will eventually return, no matter how long and deep the dislocation may be.

Bond markets have also been showing signs of stress from factors including a lack of liquidity and the increased prevalence of technical trading strategies. In the current environment, volatility is extremely high, and liquidity has fallen across many segments, including government bonds. Central banks’ actions last week will undoubtedly be followed by more moves. We’re encouraged by their efforts to bolster markets.

We hope the next few weeks provide more clarity about the scope of COVID-19, and that new cases outside China will begin to slow. That development, combined with strong support from central banks, government action and a generally solid economic foundation, would make us more optimistic that we’ll see improving sentiment—and eventually markets.

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