Market volatility spiked in the latter half of February and has remained elevated, driven by the spread of the coronavirus outside of China. This market uncertainty has been compounded by a disagreement between Saudi Arabia and Russia over the weekend about oil production that had global consequences and led to a rout in oil prices on Monday.
As the week began, the market suffered elevated financial risks from:
- Supply shocks due to the impact of the virus, with disruptions to global supply chains as one example
- Demand shocks from reduced consumer activity, with lower passenger flight volumes as one example
- The global economic impact of lower oil prices, with major producers like Saudi Arabia flooding the market
- Tightening financial conditions, which is a concern given elevated corporate debt levels
U.S. equities (S&P 500) suffered a 7.6% loss and were a shade under the technical definition of a bear market at a 19% decline from peak to trough as of the close on Monday. The yield on the 10-year Treasury plummeted to less than 0.5% over the weekend, while the yield for the 30-year Treasury broached 1%, both all-time lows. On Tuesday, investors seized the opportunity and the markets rebounded with a 5% gain in the S&P 500. The yield on the 10-year backed up 24 basis points, the largest one-day rise since 2009.
After Tuesday’s rebound, the S&P 500 is down 10.8% year to date. Global ex-U.S. markets are in a similar spot (the MSCI ACWI ex-USA is off 15.8%), and some are already in a bear market. (Bonds, represented by the Bloomberg Barclays US Aggregate Bond Index, have returned 6.1% YTD.) Given these dire equity returns, it is important to keep in mind how long this bull market has lasted and how strong the run has been for U.S. stocks. For the S&P 500, the bull market started March 9, 2009, 11 years ago, and during that time has a cumulative return of over 300%. In fact, there have been seven corrections (a decline from the previous top of 10% or more) during this bull market, including this one. So equities, while volatile, are growth assets that many institutional investors need to increase their corpus.
The time to prepare for these types of market storms is before they start, not during. While short-term changes are not recommended, this type of volatility may in fact present opportunities, be those buying opportunities for active equity and fixed income managers, the opportunity to rebalance to shift assets in response to reduced valuations, or private markets managers finding more attractive opportunities to deploy capital. These types of volatile markets also provide an opportunity for investors to assess how their managers are performing relative to expectations.
The range of potential outcomes for markets is wide, depending on the extent of the virus’s impact, whether there is a resolution to the dispute between Russia and Saudi Arabia, and the extent of global government monetary and fiscal stimulus. This decline could be nearing its end or could go on for some time. Above all, it is most important to stay calm and remain focused on the long term.
