Global equity markets plunged today (Monday, February 24, 2020), as news emerged over the weekend that the coronavirus is spreading rapidly around the world, most notably to countries such as Italy and South Korea, potentially creating a global pandemic.
The EAFE index (EFA) of foreign stocks fell by 4.0%, while the U.S. market dropped by roughly 3.5%, with declines of 1031 points in the Dow, 112 points in the S&P 500, and 355 in the Nasdaq.
Bonds prices rose, with the 10-year Treasury yield falling to 1.38%, and the price of gold rose again, in a major flight to safety.
The price of oil dropped $2 to $51 a barrel and airline stocks plunged, on worries of a major reduction in international travel. In general, concern is growing that the virus will cause an economic slowdown, not just in China but in Europe and across the world, and could have a significant impact on corporate earnings.
Prior to today, markets had been largely “looking through” the virus issue, assuming that it would soon be brought under control, and would largely be contained within China. Analysts frequently commented that similar public health crises in the past, such as the SARS virus and others, did not cause any major economic damage, and the market was usually higher six months after these outbreaks. However the recent news on the rapid spread of the coronavirus to over 30 countries, with no end in sight, has led to growing concern that it could be more serious, and the resulting uncertainty is causing a “risk off” move in global financial markets.
A related issue involves China’s decision to hold back supplies of surgical masks and other medical supplies to the U.S. This has led to growing questions about disruptions in global supply chains, and whether China can be considered a reliable partner.
In political news, Bernie Sanders won the Nevada caucus in convincing fashion, leading to increasing odds that he may be the Democratic nominee for President. This caused large declines today in health insurance stocks such as United Health (UNH) and Cigna (CI).
Today’s market selloff was not entirely unexpected. In our last few blog posts we noted that it would be a good idea to make sure that portfolios have adequate weightings in low-beta, interest-rate sensitive sectors such as utilities and real estate.
In addition we stated that “the overall market has been rising for almost five months, and therefore is overbought and overdue for a pullback. If a pullback occurs, the consumer staples sector, as a safe haven, is likely to outperform.”
In today’s selloff, the sectors that held up best were utilities, real estate and consumer staples.
Looking forward, our view is that we should not step in and buy anything immediately, as that would be like trying to catch a falling knife.
Figure 1 Perspective on S&P 500
As seen in the chart above, the S&P 500 has just broken through its 50-day moving average, but it could potentially drop all the way to its 200-day moving average, which would be a strong support level as it also coincides with the 62% Fibonacci retracement level.
The VIX shot up to 25 today, but is still well below the peaks of 35 or even 50 that it reached in previous sharp market selloffs. Given the extent of the market’s recent overbought condition and the new uncertainty regarding the virus, the market will probably need some time to stabilize, and it may need to go through a choppy bottoming out process, like it did in the first half of 2018.
With long-term bond yields coming down due to the global flight to safety into Treasury bonds, the yield curve is becoming inverted again. This implies that the Fed may need to ease at one of its next few meetings, which would tend to support the stock market.
In any case, our studies of previous market declines have provided us with some valuable insights for analyzing market corrections. Please see the article “Short Term Market Analysis” for more detail.