Linda S. Parenti, CFA
Chief Investment Strategist
Talk about volatility! The S&P 500 started out strong in January, achieving six record closing highs before sentiment turned negative, leaving the index basically flat for the month. Yet as of today’s writing, the index had clocked another five record closing highs for February alone. This means that thanks to just the first ten trading days in February, equities are up 4.9% in total return for both month-to-date and year-to-date alike.
So why the volatility? Increased uncertainty seems to always cause an early flight to safety away from risk assets such as stocks into lower risk assets like U.S. Treasuries or last-resort type assets like gold. Earlier this year, there was fear that the new coronavirus, named COVID-19, may dramatically slow global growth. While I admit to not being a virology expert, it is my understanding that a coronavirus is a type of upper respiratory virus. The symptoms may sound close to those of the familiar flu viruses, but coronaviruses are different and tend to be more serious. Therefore, when a new “novel” coronavirus becomes prevalent, it causes alarm for obvious reasons. For example, SARS was a new coronavirus that was first reported in 2003, but it was subsequently contained with no new cases since 2004. Global equity prices declined initially, but quickly rebounded.
So why the current rally in equities? Well until last Thursday’s 15,000 jump in reported cases and a corresponding increase in the number of deaths, recent reports had been encouraging. There had been a significant slowing in the rate of growth in new COVID-19 cases and an increase in recoveries. It is important to note that Thursday’s higher statistics were due to a change in counting methodology. China’s Hubei province, which has the highest concentration of infections and deaths, expanded its tallying to include patients who exhibit all the symptoms of COVID-19, such as fever, cough and shortness of breath. So individuals who were not able to be tested or had tested negative for the virus are now being added. Given this methodology change, it should not be assumed that the rate of contagion had spiked overnight. Even given the higher counts, it is a good sign that the current percentage of deaths remains a low 2.3% versus a nearly 10% mortality rate during the SARS outbreak. Multiple healthcare related firms are vigorously working on possible antidotes, diagnostics and vaccines. Given the highly contagious nature of COVID-19 and long incubation period, we should still expect more infections to show in coming weeks and months. However, if the mortality rate stays low, we continue to see a slowing rate of new infections and a rising number of recoveries, it would suggest the negative impact on global growth should be temporary and limited.
Beyond news on the coronavirus, investors have been encouraged by reasonably solid fourth quarter earnings results and robust economic statistics. For instance, January’s unemployment report was especially strong as were confidence reports on both consumers and small businesses.
There are always unknowns to consider when investing, and the coming year is by no means an exception. COVID-19 is not yet contained, and its ultimate impact on numerous industries and economies is yet to be seen. Moreover, as the election proceedings run their course throughout the year, markets will start to price in the odds of various outcomes. I recommend avoiding major asset allocation shifts in reaction to short term unknowns and speculations. There have been previous years when election outcomes have changed our nation’s balance of power quite dramatically. As we continually monitor global and legislative developments, we believe it is more advantageous to make ongoing tactical changes in holdings, while maintaining the appropriate asset allocation mix for each client’s individual goals and risk tolerance.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.