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Heightened Coronavirus Fears

February 24, 2020

At the market close on Monday, February 24, 2020, the S&P 500 posted -3.35%1 and many global equities also slid as more cases of the COVID-19 virus (the official name for the new coronavirus) were reported over the weekend in several countries. The continued increase of reported cases of the COVID-19 virus is making some investors nervous, especially given the previous view that the impact of the outbreak would be short-lived.2

On Sunday, Italy reported having 152 confirmed cases, the most out of any country outside of Asia.2 Several Italian towns are quarantined to seek to contain the spread of COVID-19.3 South Korea also reported 70 new cases, raising its total to 8333. The country that has been hit the hardest is China, with over 77,000 confirmed cases and almost 2,600 reported deaths.3 China is slowly allowing factories to reopen, with many precautions in place to try to minimize any potential spread of the virus. Data has suggested that China’s economy was only running at 50% to 60% of capacity last week4 due to continued travel restrictions, quarantined areas, and temporary plant closures. This reduced output from the second-largest economy in the world has been disrupting supply chains globally. Apple was one of the first major U.S. companies to cite the COVID-19 virus as a factor to a decrease in revenue.5

As a reminder, last August, as suitable, we decreased equities modestly (approximately 3% under your particular target) due to an inverted yield curve (a technical indicator that has historically been followed by a recession, on average, 22 months after inversion8), and the vulnerability equities often display in this part in the business cycle. In our opinion, equities were “priced for perfection,” i.e., needing perfect conditions to continue rising. Any negative news brought the risk of creating the type of volatility we are seeing now. Our August move to reduce equities also envisioned future bargain buying as we planned to repurchase equities if attractive opportunities become available. Despite today’s volatility, U.S. stock values continue “stretched” and generally are not yet at bargain prices.

It is very important to keep in mind that equities (stocks) are just one investment area. Assets that are viewed as safe havens have had an increase in demand and, therefore, value. Today (2/24/20), the price of gold jumped to its highest level in seven years ($1,684/ounce)3, while the value of many bonds increased as well: for example, the BND (a broad basket of bonds) has increased 0.90% in the last week.1

At the moment, we are not recommending that you change your portfolio allocation based on the coronavirus. While the coronavirus is currently disrupting supply chains and creating other negative economic impacts, its effects are likely temporary. Of course, as you might expect, we are continuing to monitor global conditions and will take action to purchase bargains on your behalf if they materialize.


Sources

1 finance.yahoo.com

2 https://www.marketwatch.com/story/us-stock-futures-sink-on-growing-concern-of-outbreaks-economic-impact-2020-02-23?siteid=yhoof2&yptr=yahoo

345678 https://apnews.com/5477926644b7fdd6bb5dd14de33b9f41

4 https://finance.yahoo.com/news/china-pushes-factories-reopen-risking-210000117.html

5 https://www.forbes.com/sites/jimcollins/2020/02/17/apples-profit-warning-will-be-the-first-of-many-from-us-companies-as-the-coronavirus-has-decimated-chinas-economy/#31329a1a3b7d

6 https://finance.yahoo.com/news/warren-buffett-coronavirus-net-buyer-stocks-120743935.html

7 https://www.cnbc.com/2020/02/24/warren-buffet-interview-live-updates.html

8 https://www.raymondjames.com/-/media/rj/dotcom/files/advisor%20opportunities/totm-%20diversion-inversion-submersion-coercion.pdf

Definitions

  • S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

  • Inverted Yield Curve: When the yield for bonds with less time to maturity is greater than the yield for bonds with more time to maturity. This is viewed as inverted because the standard yield curve will have an increase in yield with more time to maturity (bonds with less time to maturity would have a lower yield than bonds with more time to maturity). This is a general concept that can be applied to all bonds with differing time frames, but the inverted yield curve discussed above is the yield of 2-year treasuries and the yield of 10-year treasuries.

  • BND (Vanguard Total Bond Market ETF): The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed-income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year. The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 8.3 years.

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