This was a very difficult week for financial markets, as we witnessed the fastest 10% decline in history. The S&P 500 fell -14.4% this week, amassing a total drawdown of -15.84% in 8 trading days; wiping out all market gains since October 2019. Bond yields also reached all-time lows as the 10-year Treasury dropped to 1.116%.
After a month of watching China struggle to control COVID-19, known as coronavirus, there was an official announcement of small community spread taking place in California and Oregon, along with the first U.S. death due to the virus. Everyone should take comfort that we have the best medical professionals in the world, who will eventually produce an effective vaccine. It is not the mortality of the virus which is panicking risk assets, it is the concern economic activity will slow from the overblown fear of the virus infecting mass populations within the U.S., along with supply chain disruptions in China due to their mandated quarantines. Equity markets are actively attempting to price in the coronavirus impact to global growth, which is difficult to do with so many uncertainties and assumptions. This will all pass in time, however the past week should be taken as an opportunity to assess overall portfolio risk and to understand what you own. Indexes and certain sectors of the market may continue to struggle in this new environment, but there are certain sectors of the market that have the potential to flourish.
What the average investor should understand about the coronavirus panic is that much of it is media related. Millions of people get viruses everyday and we do not test for the exact strand. How many times have you had a fever and tested negative for the flu? Was it coronavirus or any of the other millions of viruses? No one cared, and no one tested. Only now because this new virus has a name, and an overabundance of media coverage, people are starting to panic. No one should panic, this is just another virus, but with a name. coronavirus most likely will be treated like the flu, with an annual vaccine in future years. Approximately 80% of those infected with the coronavirus have displayed only mild symptoms and have fully recovered. The media coverage and human hysteria over this virus has only exasperated declines in equity markets. While in reality the virus is not all that scary, the hysteria over the virus is very scary. This hysteria spilled over into equity markets as the fear of an economic contraction shook equities trying to price in potential changes to business and consumer habits due to the coronavirus. It is important to understand that equity prices may have wide fluctuations, for a prolonged period of time, as equity markets attempt to price for future corporate earning expectations in this new environment. Therefore, it is important to know the risk in your portfolio and to be prepared for volatility in equity prices.
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