The equity and fixed income markets are experiencing unprecedented volatility and fear about the coronavirus. This is a health crisis that has evolved into a financial challenge for policy makers as they attempt to suppress the spread of the virus while not closing down the economy entirely. Unfortunately, the only way to deter the spread of the virus is to reduce or close transportation and impose a quarantine. Since the only way we know to limit the number of infections is to reduce social interaction, we expect more states will join California, Illinois and New York in a “lock down.” For a historical comparison in 2009-2010 the H1N1 “Swine-Flu” virus infected 60 million Americans and killed 12,500, and yet the panic was not as prevalent.
The President and the Administration are attempting to pass a massive stimulus package to support people and small businesses affected. The extent of the Administration’s “go big” stimulus package should help as economic activity is interrupted for the next 30-60 days. Since investors have no visibility into how this will affect revenues and profits, there are significant price discovery gyrations. Corporate earnings estimates are declining, and any guidance from company management teams will depend largely on the time it takes for the virus curve to reach an infection plateau and then decline.
The S&P 500 Index peaked on February 19 and has had a waterfall decline of 30%. The virus is the biggest issue, but the energy sector has led the market decline due to the Saudi-Russia production dispute. The Saudis wanted to curtail oil production to keep the price per barrel at a reasonable level, but Russia refused to reduce output. The Saudi’s raised their production causing prices to collapse to $23 per barrel. Needless to say, very few companies or countries can produce profitably at that price so we expect an agreement on production levels soon.
The length and depth of this decline have hit smaller companies, travel and leisure businesses, as well as the energy, material and industrial sectors the hardest. We expect the consumer staples, utilities, healthcare and defense businesses will perform best for the next few months. We also have more cash than usual in the portfolios. The reasons to anticipate a swift recovery are the significantly lower interest rate environment, the large Federal stimulus package and lower energy prices. These factors will expedite and enhance the recovery process.
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