Coronavirus: Markets on the seesaw

March 5, 2020 | by
Erik Ristuben
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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This publication may contain forward-looking statements. Forward-looking statements are statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as or similar to, "expects", "anticipates", "believes" or negative versions thereof.  Any statement that may be made concerning future performance, strategies or prospects, and possible future fund action, is also a forward-looking statement.  Forward looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risk, uncertainties and assumptions about economic factors that could cause actual results and events to differ materially from what is contemplated.  We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward-looking statements.  Russell Investments has no specific intention of updating any forward looking statements whether as a result of new information, future events or otherwise.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.  The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.

Indexes are unmanaged and cannot be invested in directly.

The S&P 500® Index, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

S&P/TSX Composite Index: The benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange.

With a fixed number of 600 components, the STOXX® Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It is derived from the STOXX® Europe Total Market Index (TMI) and is a subset of the STOXX® Global 1800 Index.

MSCI Emerging Markets Index: A float-adjusted market capitalization index that consists of indices in 24 emerging economies.

The MSCI AC (All Country) World Index: Captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*. With 2,791 constituents, the index covers approximately 85% of the global investable equity opportunity set.

The Dow Jones Industrial Average (DJIA) is a stock market index of 30 large U.S. companies created by Dow Jones & Company co-founder Charles Dow. First calculated in 1896, the DJIA is currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global.

 

CORPCA-00233

This week, the market has seesawed between optimism and pessimism. We expect that to continue. 

The basic market challenge is that the market does not know what the overall impact of the coronavirus will be on the global economy, or when it will end. Neither do we. We do not claim to have any edge or unique ability to forecast the progression of this outbreak. Furthermore, leading medical experts have stated that such an exercise is effectively impossible.

Now that the virus has more than a foothold in both the U.S. and Europe, the market is focused on the potential negative impacts in those economies. That said, given the unknown nature of the economic threat, we believe markets will be heavily sentiment-driven in the short term, creating continued volatility and uncertainty.

Here is what happened this past week:

Equity markets were down in Europe on Wednesday (March 4), probably a reflection of Tuesday’s (March 3) negative U.S. equity market. The U.S. had a good day Wednesday in a bounce back from Tuesday. But Thursday (March 5) has opened quite negatively in the U.S., with Europe remaining effectively flat. The 10-year Treasury yield fell below 1.00% for the first time ever on Tuesday, then rose above 1.00% yesterday, then fell back below today. Credit spreads narrowed on Wednesday, in sympathy with the positive equity markets. They have widened a little in early trading on Thursday.

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We’re paying attention to a comment from former European Central Bank head, Jean-Claude Trichet, that the market might actually view the fully coordinated central bank action as a contributor to market concerns. In essence, if all the central banks act as if the current situation is an economic crisis, their actions, could introduce potential panic and impact investor sentiment. In this context, the U.S. Federal Reserve (the Fed) rate cut earlier this week was positioned as more of a preventative measure than actually attacking a serious and current problem. We believe that is a correct interpretation of the Fed move.

 

Reminder: Investment plans are for moments like this

 

Yes, infection rates in Europe and the U.S. ticked up, with more countries and regions now having diagnosed cases. While that may seem like news, it is not unexpected to us, as pandemic experts are saying that in the near-term, the virus will very likely continue to spread. It may get worse before it gets better. But in the end, no one knows all of what happens next.

 

We diversify our investments because we do not know what will happen. If we knew what was going to happen, we would only own the asset that we know will go up the most. Instead, we acknowledge the reality of uncertainty and build an investment plan to help us navigate that uncertainty. We have that plan so that when we experience periods of tremendous uncertainty, like now, we do not respond emotionally to the news of the day. 

 

In the light of the uncertainty, if we chose to do so, we could make a very compelling argument that the negative impacts of this crises will be temporary. At the end of that temporary disruption, the economy may experience a V-shaped recovery1 fueled by pent-up demand and cheaper money.

 

We could also make a compelling argument that this is going to get worse before it gets better—that the steps to control the virus may lead to significantly lower economic growth, perhaps even economic contraction, maybe even a technical recession. If the more pessimistic aspects of this scenario play out, that may mean continued, meaningful, negative equity performance in the near term.

 

Given the nature of the risk to these markets, nobody knows if either scenario is correct. They could both be right. We believe it is likely that they are not both wrong. In times of such uncertainty, we also believe it is almost always a good idea to stick with the plan. That is why you have it.


1A V-shaped recovery is characterized by a sharp economic decline followed by a quick and sustained recovery.

Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This publication may contain forward-looking statements. Forward-looking statements are statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as or similar to, "expects", "anticipates", "believes" or negative versions thereof.  Any statement that may be made concerning future performance, strategies or prospects, and possible future fund action, is also a forward-looking statement.  Forward looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risk, uncertainties and assumptions about economic factors that could cause actual results and events to differ materially from what is contemplated.  We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward-looking statements.  Russell Investments has no specific intention of updating any forward looking statements whether as a result of new information, future events or otherwise.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.  The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.

Indexes are unmanaged and cannot be invested in directly.

The S&P 500® Index, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

S&P/TSX Composite Index: The benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange.

With a fixed number of 600 components, the STOXX® Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It is derived from the STOXX® Europe Total Market Index (TMI) and is a subset of the STOXX® Global 1800 Index.

MSCI Emerging Markets Index: A float-adjusted market capitalization index that consists of indices in 24 emerging economies.

The MSCI AC (All Country) World Index: Captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*. With 2,791 constituents, the index covers approximately 85% of the global investable equity opportunity set.

The Dow Jones Industrial Average (DJIA) is a stock market index of 30 large U.S. companies created by Dow Jones & Company co-founder Charles Dow. First calculated in 1896, the DJIA is currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global.

 

CORPCA-00233