Macro Overview

Fear has been permeating capital markets worldwide as the impact of the (COVID-19) coronavirus continues to evolve. Global economic forecasts have been revised downward by the International Monetary Fund (IMF) and the World Bank as factory closures, quarantines, and travel bans continue to hinder numerous industries.

The Federal Reserve helped alleviate markets with a rate reduction announcement as a result of a rare emergency meeting. The rate cut was made in order to maintain liquidity and structure in an already stressed environment caused by the virus outbreak. Fed Chairman Jerome Powell said that “the fundamentals of the U.S. economy remain strong,” yet the coronavirus may pose evolving risks for the economy. Yields on Treasuries fell to historical lows as funds migrated from equities to bonds, driving bond prices up.

U.S. equities registered their largest weekly losses since 2008, with $3.6 trillion worth of stock values erased within the last week of February. The rapid decline was among the swiftest in market history, creating havoc in all sectors and industries. Global equity markets also saw similar losses as large capitalized international stocks and emerging market equities gave up gains. Global equity valuations retreated due to uncertainty surrounding the extent of the outbreak and its effects on the global economy. Analysts are closely following companies with supply chains tied to China, which has become a widespread concern.

The virus outbreak has affected financial markets differently relative to other more traditional disruptions. Supply chains tethered to China are creating a shortage of supplies and products, while demand had not been an issue until the virus outbreak. Should a vaccine emerge making the coronavirus outbreak a shorter term incident, then pent up demand could propel economic activity higher.

The National Center for Biotechnology Information reports that advancements in medical technology over the years has allowed the development and creation of new vaccines to combat viruses at a faster pace than decades ago.

The extent of the coronavirus can be put into perspective as related to influenza, also known as the flu, which currently affects over 32 million Americans. Flu-related deaths in the United States are estimated to reach between 18,000 and 46,000 this flu season alone, as reported by the Centers for Disease Control. The center also estimates that as many as 45 million Americans will suffer flu-related symptoms and illnesses during this year’s season. (Sources: IMF, World Bank, Fed, U.S. Treasury, NCBI, CDC)

Equities Slump As Concern Elevates – Stock Market Overview

February saw stock valuations retreat to where they were in July and August 2019. Analysts believe that the pullback has helped identify several overvalued stocks. Valuations are considered to be more in line with historical standards relative to where they were at the beginning of the year. The final week of February saw all equity indices fall substantially. The S&P 500 Index slumped 11.49%, the Dow Jones Industrial Index fell 13.6%, and the tech-heavy Nasdaq Index gave up 10.54%.

The pullback among all major equity indices has been one of the fiercest in market history, yet reigning in valuations that were considered lofty by many analysts. Fortunately, the stellar performance of the equity markets in 2019 is serving as a buffer for the dramatic pullback.

When U.S. equity markets fell 14% over two months in 2003 during the SARS outbreak, rates were much higher, with the 10-year Treasury yielding over 3.5%. The yield on the 10-year Treasury on Feb 28th at 1.13% is lower than the current S&P 500 Index yield for stock dividends at 1.97% on Feb 28th. Analysts view the yield difference as a benefit for stocks for yield seeking investors. (Sources: S&P, Dow Jones, Nasdaq, Bloomberg, U.S. Treasury)

Treasury Bond Yields Drop To Historic Lows – Fixed Income Update

Treasury bond yields traded at record low levels, driven by global investors seeking safe haven assets. All Treasury maturities yielded well below 2% at the end of February, lower than the Fed’s inflation target of 2%. The dramatic drop in yields brought the 10-year Treasury bond yield to 1.13 % at the end of February, the lowest yield for the 10-year Treasury on record. An insatiable demand for global bonds brought yields lower across all bond sectors, elevating positive returns for bonds in nearly every sector thus far this year.

The Federal Reserve reduced the Fed Funds rate, a key monetary tool rate, following a rare emergency meeting. The rate reduction was made with hopes of stemming market uncertainty and shoring up liquidity for extended periods of volatility. The announcement triggered a drop in bond yields across various bond sectors. (Source: U.S. Treasury)

Economic Cost of The Flu – Domestic Economy

As a gauge of how a virus can affect the U.S. economy, the National Center for Biotechnology Information monitors and tracks the economic costs related to the flu every year.

The estimated average annual total economic burden of influenza, also known as the flu, to the healthcare system and society stands at $11.2 billion, which includes medical expenses such as hospitalization, physician visits, and vaccines.

A present concern with the coronavirus is the productivity costs associated with the loss of employee attendance, business travel restrictions, and amplified preventive measures. The flu virus has for decades inflicted companies in all industries with heightened productivity costs. (Source: https://www.ncbi.nlm.nih.gov/pubmed/29801998)