Todd’s Take on the Market
Stocks got taken to the woodshed last week as markets have been rattled by the worsening coronavirus outbreak around the world. The Dow lost 12.26%, the S&P 500 dropped 11.44% and the NASDAQ shed 10.52%. These declines were one of the most severe declines over the past 90 years.
The steep declines occurred more than a month after the news of the virus first surfaced, as the market initially believed the virus would be contained to China. Reports that the virus has now spread to over 48 countries dimmed hopes the rest of the world would be spared.
There is little doubt that the coronavirus will continue to weigh on the global economy, and the U.S. will not be immune. There is still so much we don’t know, but it is premature to say that the virus would send the economy into a recession, but many analysts are certainly lowering their growth forecast.
For a leading example of where fear is taking things, the benchmark 10-year U.S. Treasury fell to 1.14% and the 30-year fell to 1.67%. These are all-time low yields on these Treasuries.
The CBOE volatility index (VIX) ticked up to almost 50 from the previous week when it was trading around 14. There is no sign of volatility putting its feet up any time soon, and that should come as no surprise. When the markets get rattled as they did last week, it’s like a bell getting rung, and the vibrations can last long after the chime.
The volatility curve, which measures risks into the coming months appears to reflect investor expectations that the virus is more likely to become a normal illness that we have to deal with and may not be a doomsday scenario that the markets were pricing in last week. Investors have been wrong in the past, of course, and because the virus is a medical issue and not a financial one, any long-term expectations about where it might have to be taken a little less literally than, say, expectations of a rate cut.
Speaking of a rate cut, the FED will meet on the 17th and 18th of this month and the market is pricing in at least a 25-basis point and some even are expecting a 50-basis point cut. Even if the FED takes emergency action, it might not help much – instead, investors may see that as a sign of desperation, but they have said they will use all the tools at their disposal to support the economy. Yet, it is hard to see how a rate cut is going to relieve the stress brought on by the virus.
Right now, there are many moving parts, and this week will or could, give us a sense of where things are headed. So stay tuned and we will keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
