New Developments Drive New Reactions to the Coronavirus
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 2/21/2020. Rates and Economic Calendar Data from Bloomberg as of 2/21/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets cooled down last week after February’s hot start. In the U.S., the S&P 500 Index fell to a level of 3,338, representing a loss of 1.22%, while the Russell Midcap Index retreated 0.81%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -0.52% over the week. On the international equities front, both developed and emerging markets finished in the red returning -1.23% and -1.96% last week respectively. Finally, the 10-year U.S. Treasury yield fell to 1.46%, down 13 basis points from the previous week.
Once again, the infamous coronavirus is attracting attention. This time, investors may be taking the potential economic implications a bit more seriously. For some time, we’ve known about the virus’s potential impact on China, and in turn, the global economy. Disruption to product demand and more substantial adverse effects on the global supply chain from the world’s second-largest economy was worth monitoring. However, up until recently, worries were staved off by positive economic data, earnings growth, and potential fiscal and monetary support in China. What changed?
Early last week, the scales started to tip when Apple signaled that the virus would likely put a drag on earnings, due to the aforementioned supply and demand disruption. When the world’s largest company talks, investors often listen. Perception started shifting, leading us into this week. U.S., European, and Asian markets opened deep in the red. This time, the threat of additional spreading across the globe and pandemic fears rocked markets. In Asia, concerns centered around South Korea and exports. In Europe, a spike in cases in northern Italy dealt a significant blow to an already struggling region. The proximity of Italy to countries like Germany and Switzerland, a major manufacturing hub in the Eurozone, pressured markets further.
Not to discount the significance of the health situation, we believe fears from an investment perspective are overblown, specifically for investors with long or intermediate time horizons. As an example, the chart below helps to put the coronavirus’s impact on emerging market equities into context. Sharp recoveries have historically followed sharp sell-offs attributable to potential pandemic fears. Outbreaks may move markets, but they have not driven global recessions historically.
Source: Wells Fargo Investment Institute
We encourage investors to stay disciplined and work with experienced financial professionals. The financial markets have, and will continue to, experience shocks and cycles. However, unnecessary reactionary investment decisions can be detrimental to longer-term portfolio returns. A qualified financial professional can often help manage an investor’s portfolio through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.