Markets Get a Wake-Up Call
Markets have finally begun to price in the real risk that could arise from the global spread of the coronavirus. Virtually every sector across the board closed red, and tech, travel, and health insurance firms took major hits.
Even after the WHO declared the coronavirus as a global emergency, markets had muted responses on hopes that the virus has been contained.
Apple gave investors a fair warning last week that it could potentially miss its first-quarter results as both sales and production have taken a hit in China. The wariness of the world’s largest technology company wasn’t enough to spook the markets this much.
So what happened over the weekend?
Numbers came out. The sudden rise in the number of international cases observed - especially in Italy and South Korea coupled were enough to kick the markets out of complacency. Currently, there are 80,130 confirmed cases worldwide, with 2,698 deaths.
As portfolios get rebalanced, we are seeing capital outflows from equities to safer asset classes such as bonds and fixed income instruments. The S&P 500 dropped 3.4%, closing at 3225.89, with all 11 sectors posting declines. Demand for treasuries grew with 10-year Treasury note down to 1.377%.
Safer assets like Gold jumped 1.7%, closing at $1,672.40 per ounce, the highest level since Feb. 6, 2013. The market volatility index, the VIX, rose by 46.55%, closing at 25.03.
Efforts to contain the spread of the virus have been drastic across the globe, and US President Donald Trump encourages you to "buy the dip".
“The Coronavirus is very much under control in the USA. We are in contact with everyone and all relevant countries. CDC & World Health have been working hard and very smart. Stock Market starting to look very good to me!”
As portfolios get rebalanced, institutions are probably reducing their net long exposure to equities. The real test, however, is about to begin for retail traders who’ve almost tripled their trading volume in the past three years, led by price wars by brokerages and commissions free trading.
In response to growing fears about the Virus, major companies have begun to abandon profitability outlooks and guidance. Apple could be losing one-fourth (~$5 billion) of its China revenue. Payments processing giant Mastercard has lowered its quarterly revenue growth forecast. United Airlines has abandoned its 2020 outlook on profitability.
It should then come as no surprise that the market has priced in a future rate cut by July at an 85% chance, up from 39% a month ago. If this happens, the Fed would use up the rope it's got left in stimulating economic activity by reducing rates and lowering costs of borrowing. The downturn (if it happens) after could then be disastrous as markets would then confront the world without Fed support.
If you’re a self-directed investor or a trader, remember to stay diversified and have your portfolio hedged with asset allocations in safer classes such as bonds or gold. The bloodbath in North America wasn’t without at least one sector that escaped - Canadian Mining companies, whose index closed up almost 1%.
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