After an upbeat start to 2020 and the impressive year we had in 2019, markets have done an abrupt about-face on the likely impact of the new coronavirus. The S&P 500 was down for 7 sessions in a row starting on Feb 20th - down 13% at its low - before reversing the trend this past Monday.   Since then,
we’ve had two 4%+ days and are now down just 3% for the year. To give you a sense of the volatility, we’ve only had 35 other days in the last 25 years where the S&P has moved up over 4% in one day – we just got 2 in one week. And for the first time ever, we've seen the 10 year Treasury rate dip below 1%.

There are 4 main factors driving this volatility (worst week since financial crisis and then the reversal this week):

1.    Worries that the spread of coronavirus would lead to a global recession and collapse in corporate earnings
2.    Fears an economic downturn would reduce President Trump’s chances of winning re-election (remember the market prefers Trump because he’s viewed as the most corporate friendly candidate)
3.    An overbought, complacent market, which made the declines more intense, and
4.    Modern market plumbing—as algorithms, quant funds and High Frequency Trading take over more and more of the market

While we still don’t know how far and wide the coronavirus will spread, the market reacted positively yesterday for 2 primary reasons:

1.    The G-7 commitment of coordinated fiscal and monetary policy easing which is on top of the 50 basis point rate cut by the Fed. The IMF announced a $50 billion package and the House of Representatives announced an $8.3 billion package to fund coronavirus spending.
2.    Joe Biden's showing on Super Tuesday. The markets favor a moderate centrist Democratic nominee and Joe Biden pulled through.

While I'd love to see a continued streak of these 4% plus days, the reality is this bumpy ride is not over. The globally economy is at the mercy of the coronavirus' one-two punch - the global impact on both supply and demand.

On the one hand, the virus is curbing the capacity for Chinese factories to produce, which is depriving companies elsewhere for materials they need for their own businesses. And on the other, consumers everywhere are reluctant to shop, travel or eat out. Both the supply side and the demand side of the global economy have been weakened and we still don't know how far and wide this will run.

Companies including Hyatt Hotels and United Airlines have withdrawn their earnings outlooks, manufacturers like Samsung and Toyota are still trying to get production online and school closings, cuts to non essential travel and mild panic are ramping up.

This will put more pressure on central banks and governments to deliver economic fixes. And governments will have to get more creative because the Fed lowering rates won't stop the virus from spreading and from consumers staying home (good thing for online shopping though). If governments step up in a big way on spending and curbing the spread of the virus, we could all be taking a sigh of relief very quickly. But we should be prepared that they may not be as effective as we'd like.

So, what does this all mean for you ?

Well, this bumpy ride won't end too quickly due to the uncertainty of the global economic impact of the virus. The reality is we really don't know how bad (or not) this will get. If we use history as a guide, this will end up being a blip in the long run but we are living and feeling the day to day. And as I’m writing this the futures are pointing down on the stock market today. This is an evolving market and for stocks to truly stabilize, we need improvement in the coronavirus spread.
The things we can control are: the quality of your portfolio, the discipline of diversification and rebalancing and most importantly, managing the cash flows. It's a great time to look at monthly/ongoing cash flow needs but also any potential one off needs that you may have in the next 12-24 months. Feel good about your portfolio, know what you are invested in and why and if you have any questions, please reach out to schedule a call. It's a great time to get on the phone and make sure your plan and portfolio are on track to weather a potential coming storm.

Written by our Chief Investment Officer Sevasti Balafas, GoalVest Advisory

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