My recent blog post on Feb 21 titled “The Quiet Rally” highlighted how bonds had continued to improve on strong returns garnered in 2019. I made the point that “market timers” might view the bond market as near a top, but that there were many factors, including “external” factors, that could continue to support a low rate environment. Then, Monday Feb. 24 happened!
The Dow was down -3.56% (-1,033 points), the S&P 500 was down -3.35% (-111 points) and the NASDAQ was down -3.71% (-355 points). Meanwhile, the flight to quality supported bonds with the 10-year Treasury bond price being bid up to force yields lower by 10 basis points for a yield of 1.37% and broad aggregate core bonds (SCHZ) rallied with a daily total return of +0.31%. All of this was due to news on the coronavirus turning worse over the weekend with reports of new cases in Italy and South Korea.
The human tolls are high with over 77,000 infections and 2,529 deaths through today; mostly centered in China. But, rapidly expanding infections around the globe seem to be developing quickly such as reports of infections in northern Italy.
The economic and financial impacts have not gotten a hold yet, but most forecasts are starting to portend the potential for a large realized impact. Most of the potential problems are centered on industries dependent on supply chains from China, but other industries like tourism and airlines are also subject to problems due to potential quarantines and travel restrictions.
Certainly, there is a good level of uncertainty as to how the coronavirus problem will play out. It appears that the coronavirus is more contagious and more prone to incubation periods than other flu epidemics. Its impact on the economic and financial situation is not a complete unknown, but any attempts to gauge an expected outcome is prone to be wrong with a large margin of error. So, as one market observer said, “sell first, ask questions later!”
What needs to happen for there to be a “sell” trigger? I would look for a prolonged disruption in earnings and earnings growth to portend a deep sell off. Also, we would need to see any disruption to be material. Stock values are dependent on earnings; and forecast earnings are one thing; realized disruption in earnings is another. Also, we will be watching closely for other factors and unknown “black swans” that could disrupt the markets.