The markets are responding to the coronavirus, but that doesn't mean that advisors should.
Fears caused by the spread of the coronavirus from China to six of the word’s seven continents have caused major equity indexes in the U.S., China, Europe and Japan to fall into correction territory on Thursday.
After financial markets followed Monday’s more than 1,000-point drop in the Dow Jones Industrial Average with consecutive days of continued declines, it’s become clear that the investment world believes coronavirus will significantly disrupt the global economy, wrote Commonwealth CIO Brad McMillan in comments circulated on Wednesday.
“The epidemic has already caused real economic damage in China, and it is likely to keep doing so for at least the first half of the year,” wrote McMillan. “The same case seems likely for South Korea. These two countries are key manufacturing hubs. Any slowdown there could easily migrate to other countries through component shortages, crippling supply chains around the world. Again, there are signs in the electronics and auto industries that the slowdown is already happening, which will be a drag on growth. This risk is largely behind the recent pullback in global markets.”
From a financial planning perspective, however, the news wasn’t all bad. Lowered growth expectations have sent interest rates downward, which will make it more difficult to wring income from client portfolios – but lower rates provide opportunities for other moves like buying a home or refinancing a mortgage, wrote Mark Hamrick, senior economic analyst for Bankrate.com, on Wednesday.
"As with other unexpected events which have had big impacts on financial markets, this episode will pass and investors will have other things to consider, for better and for worse,” said Hamrick. “In the meantime, the steep decline in Treasury yields has been reflected in mortgage interest rates, lending further support to the housing market. That presents opportunities for prospective homebuyers and current homeowners intrigued by the prospect of refinancing."
Mark Hackett, Nationwide’s chief of investment research, argued that this week’s declines represent an overreaction to the spread of the virus.
“Reacting to the spike in VIX and drop in yields is likely an overreaction. It is difficult to gauge the ultimate impact, but violent moves like the last two tend to reverse,” said Hackett. “The move is similar to the decline in August 2015 in the China devaluation, and the S&P 500 index recovered the loss by November and set up for a very strong 2016 and 2017.”
In their own published insights on the market downturn, quantitative investment managers at Richard Bernstein Advisors argued that the impacts of coronavirus will likely be short term – investors should instead be focused on fundamental factors that they believe will be more likely to drive long-term performance: the divergence between U.S. small –cap stocks and large caps, slowing employment growth, a growing federal budget deficit and a flat yield curve all provide ample reasons for investors to temper their bullish sentiments.
According to a report by Columbia Threadneedle Investments’ Josh Kutin, head of asset allocation, and Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy, most investors are responding to the coronavirus threat by seeking out quality.