Gill Capital Partners March 2020 Market Commentary
Coronavirus and Market Update
Fear over the coronavirus has continued to escalate over the past couple of weeks, driving unprecedented market, government and individual reactions. These reactions, coupled with continued uncertainty, have driven stock prices and bond yields precipitously lower. As the market continues to assess the impact of coronavirus, we wanted to share an update on what has changed over the past couple of weeks, our updated thoughts on the potential economic and market implications, what type of government response we might be able to expect, and what investors should do be doing now.
Where We Stand Now - Coronavirus, Energy Markets & Federal Stimulus
As our understanding of the coronavirus continues to evolve in real time, markets have seen significant weakness during the past couple of weeks. Fears have grown that coronavirus will derail economic growth and disrupt global supply chains. Further exacerbating the situation, oil prices have plunged to multi-year lows as tensions between Russia and Saudi Arabia have escalated following their failure to strike a deal on production cuts over the weekend.
We’ll begin with an update on the coronavirus: as of this writing, the CDC is confirming approximately 500 cases of coronavirus and 22 deaths in the United States. Globally, the virus has been confirmed in approximately 108,000 people and is responsible for more than 3,800 deaths. While reported cases are increasing in the U.S., experts in China and South Korea are cautiously optimistic that the outbreak is slowing as new infections have fallen over the past few days. The public reaction to the virus has varied around the world, with China and S. Korea imposing near draconian measures to halt the transmission of the virus. These measures have included closing businesses and schools, imposing travel restrictions, and strictly enforcing mandatory quarantines. While such measures have not been taken in the U.S. outside of a few isolated areas, many individuals and businesses have taken it upon themselves to cancel travel plans, avoid group gatherings, etc. This fear-based reaction (warranted or not) is unlike anything we have seen before, and the economic impact of that reaction is real. Travel and energy related sectors have been impacted the most thus far. Energy-related businesses were expecting OPEC to cut supply over the weekend in response to softening demand, as they have done many times before in similar situations. However, Russia refused to agree to a supply cut, which drove crude oil prices precipitously lower and added to an already volatile situation.
Has the global economic outlook changed that much in the last couple of weeks?
While the virus will inevitably pass, the economic impact could be more severe than what we have seen from this type of exogenous event in the past given the unprecedented reaction. Many economists are now tempering growth forecasts, calling for flat to slightly negative growth for calendar year 2020 with an increasing likelihood of at least a shallow recession in the first have of this year. Nobody knows how long this will last or how widespread the virus will become, so economic forecasts are somewhat meaningless, but we are anticipating a slower growth environment until the virus threat is contained or public perception has moderated.
What type of response might we expect from the government?
The government has two main tools at its disposal when it comes to providing stimulus during exogenous economic shocks: monetary stimulus and fiscal stimulus, and we think both are on the way. Monetary stimulus is largely focused on interest rate manipulation through the Federal Reserve. The Federal Reserve came out last week and implemented an emergency rate cut of the Federal Funds rate of half of one percent. The Federal Reserve meets again this month, and the market is anticipating more interest rates cuts from that meeting. While a public health crisis isn’t easily solved by lower interest rates, the Federal Reserve sent a clear signal that they are here and will support markets by providing liquidity. Fiscal stimulus is a much broader tool, aimed at stimulating economic activity, and has ranged from implementing tax cuts, sending checks (remember the Economic Stimulus Act of 2008 when checks were mailed to everyone?), and expansion of unemployment benefits to direct stimulus and support to impacted individuals and industries. It sounds like a new fiscal stimulus plan is in the works and we anticipate details to be announced shortly. Announcement of a fiscal stimulus package would certainly be a positive development for markets. We expect this to include payroll tax cuts, support for businesses adversely impacted by these events, and other stimulus that will be announced shortly.
What if anything should investors do now?
First of all, we know volatility like we are seeing can be stressful. However, we generally do not recommend making significant changes to your plan during times like these. Coronavirus may be new, but market volatility is not. Patient investors who stay the course tend to do better over time. Market downturns are inevitable, but markets have bounced back from crises in the past, and they will again. Remember, market corrections of 10% or more have happened about once every year since 1950 and they don’t last forever. Investing is a bumpy road higher. You have a plan that was thoughtfully designed with your long-term goals in mind. We are always here to have a conversation with you, in good times and in bad.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.