By Kevin D. Mahn, President and Chief Investment Officer, Hennion & Walsh Asset Management
Global equity markets plunged drastically lower last week, as amplified concerns over the spread of the coronavirus (COVID – 19) stoked investor’s fears. In the U.S., the S&P 500 Index fell to a level of 2,954, representing a loss of 11.44%, while the Russell Midcap Index retreated 11.92%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -12.01% over the week. Those looking for a respite from negative returns were unable to find relief in international equities, as developed and emerging markets moved 9.55% and 7.23% lower. Finally, the 10-year U.S. Treasury yield fell to 1.13%, down 33 basis points from the previous week.
In terms of interest rates, the Federal Reserve (Fed) had previously indicated that they did not anticipate making any additional moves in 2020, which would have left the Federal Funds Target Rate in a range of 1.50% – 1.75% for the year. However, the Fed did comment during the sell-off last week that they will, “act appropriately to support the economy” as needed.
It strikes us at this time that last week’s sell-off was likely overdone, specifically for investors with long or intermediate time horizons. Underlying economic fundamentals remain relatively strong and perhaps some of the sell-off is attributable to investors using the virus as a reason to take some profits from a market that continued to reach all-time highs.
While certain store and factory shutdowns will have an impact on first and second quarter earnings and economic growth, we would expect growth to return during the second half of the year, notably during the fourth quarter. This is under the presumption that the coronavirus does not escalate into an outright global pandemic in 2020, pushing the U.S. and global economies into a potential recessionary period. In this regard, it may be helpful to consider that sharp recoveries have traditionally followed sharp sell-offs attributable to potential pandemic fears. Outbreaks may move markets significantly, but they have not driven global recessions historically.
Thus far this week, the markets bounced back significantly on Monday with hopes of central bank intervention and perhaps a similar belief to ours that the sell-off was overdone. In total the Dow Jones Industrial Average moved 1,294 points higher on Monday, representing a gain of over 5% and the single largest daily point gain in history.
On Tuesday, the Federal Reserve took action announcing a 50 Basis Point (i.e. 0.50%) reduction to the Federal Funds Target Rate. This now leaves the benchmark rate in a range of 1.00% – 1.25%. The cut itself was not surprising as it was likely priced into the markets already but that timing of the cut took many by surprise as most thought they would wait until their next scheduled meeting on March 17-18 to announce such a move.
During a press conference following the announcement of the rate cut, Fed Chair Powell noted the underlying strength of the U.S. economy and labor market and indicated that the cut was done to help provide support to the economy during the uncertain time-frame of the coronavirus outbreak. Chair Powell also said that they will continue to monitor the situation and take additional actions as necessary, remembering, of course, that their two mandates remain to promote maximum employment and price stability in the U.S. It is not entirely inconceivable that the Fed would “take back” this cut at a future date when the coronavirus threats to the economy are deemed to be behind us, though the timing of such increases may be difficult. As we write this post, market reaction to the “surprise” cut was initially mixed but turned markedly negative as the day moved along pushing the yield on the 10 year U.S. Treasury below 1.00%.
While no one can know the full extent of the consequences of the coronavirus at this time, investors should keep perspective on their longer term financial goals, maintain discipline, invest in quality companies and revisit the diversification that may, or may not, be in place within their portfolio strategies consistent with their own investment time-frames and tolerances for risk. If they do not have a financial plan in place or are unsure of the level of diversification within their portfolio strategies, they would be wise to consult with financial professionals to assist in both cases. From our experience, having a well-constructed, longer term financial plan in place often provides solace during periods of heightened volatility and uncertainty.
Disclosure: The accuracy of this information is from sources we believe to be reliable but is not guaranteed.