A Turn for the Worse
Since our last update on the new coronavirus (February 27) the outlook has dimmed considerably, both for the spread of the virus and for the global economy. As of March 9, confirmed cases of the coronavirus surpassed 110,000, and more than 4,000 have died. The World Health Organization says the outbreak is close to being labeled a pandemic now that over 100 countries have been affected.
Around the world, local and national governments are implementing measures to contain the spread of the virus. These measures often include various forms of social distancing, school closures and work-from-home programs. In extreme cases, mandatory quarantines such as those in Hubei Province, Italy and cruise ships have been put into effect. As expected, these measures are helpful in containing the spread of the virus but can have a detrimental effect on economic output as global supply chains are disrupted.
A hat-tip to my friend Han Yik at the World Economic Forum for sharing the chart below. This illustration highlights the importance of implementing controls early in order to maintain the rate of transmission of the virus below the capacity of the healthcare system. In situations of uncontrolled transmission, such as the cases in Wuhan Province and Italy, the number of confirmed cases grows at a pace beyond the capacity of their healthcare system.
The situation in Italy has unfolded precipitously in recent days and presents the latest case study of uncontrolled transmission. On February 20, Italy had 3 confirmed cases of coronavirus. That number grew to 3,858 by March 5 and over 9,172 by March 9. On Monday evening, in the latest attempt to limit transmission, the Italian government announced the extraordinary measure of calling for a national quarantine with severe travel restrictions.
As discussed in prior updates, containment measures are causing significant disruptions in global supply chains. Following decades of globalization, it’s often the case that products are manufactured with components from multiple countries. When suppliers from one or more countries fail to deliver their parts it has ripple effects throughout the global economy.
Demand shocks are also having a dramatic impact on some industries. Demand for hospitality, leisure and travel, for example, have declined significantly. In recent days, we have seen announcements of cancelled sporting events, concerts, festivals, conferences and even work-related travel. The State Department and the CDC are now urging Americans to avoid cruise ships.
Adding insult to injury, OPEC rattled oil markets over the weekend by opening the spigots and pumping excess supply into the global markets. The price of oil collapsed from a recent high of $65 in January, to less than $30 before bouncing back to $33. This development puts severe strain on the oil sector in the US, which by some estimates needs prices to remain above $50 in order to remain profitable. In turn, deteriorating credit conditions in the oil sector are spilling over into the financial sector and other lenders to these companies.
The net result of all these developments has been a dramatic spike in volatility as markets accelerated the “risk-off” trend. Equity markets around the world suffered severe losses on Monday on top of the corrections suffered in recent weeks. Most European markets entered bear market territory (losses greater than -20% from the prior peak) and the Dow Jones Industrial Average suffered its worst loss in 12 years.
The flight to safety led to sharply lower yields in the Treasury bond market. For the first time in history, on Monday the entire US Treasury yield curve was below 1% when the 30-year Treasury bond briefly reached a level of 0.7%.
The outlook is for continued volatility in the near term. Keep in mind, financial market volatility goes both ways: there will be strong “up” days mixed with “down” days. The very nature of this crisis is highly unpredictable, as nobody knows exactly where “hot-spots” of uncontrolled virus transmission will occur.
The Federal Reserve cut interest rates by 0.5% last week and is likely to cut rates again in the near term. However, monetary policy can help alleviate the consequences of economic disruptions but it doesn’t solve the problem. Fiscal policy may help, especially if it comes in the form of measures to dispel uncertainty about the virus. This could include Federal support for ample virus testing resources, real-time apps to track virus transmission and tax relief for the hardest hit sectors of the economy.
With regard to your investments, as always it’s important to ensure you have the right balance of “safe” assets and “risky” assets. As mentioned in recent updates, we’re seeing some investments hold steady and some are even appreciating during the recent bout of volatility. High quality bonds, of course, are providing a strong ballast to investment portfolios. As always, we will continue to monitor the situation, closely review clients’ portfolios and will report periodically as needed.
On a personal note, we strongly encourage everyone to follow CDC guidelines for prevention and treatment.
The above commentary represents the opinions of the author as of 3.10.20 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.