Markets & Economy

The past two weeks have seen incredible volatility in financial markets. The rapidly evolving Coronavirus situation, an emergency move by the Federal Reserve, and a wild week in US politics have given investors more than enough news to digest.

Below, we provide our views on three of the major events that stirred markets this week.

Coronavirus Concerns Go Global

Coronavirus fears took a toll on markets as it became increasingly clear that the virus was not going to be able to be fully contained. As the infection began spreading across the globe, popping up in dozens of countries, investors grew fearful that the virus would weigh heavily on economic growth.

Medically speaking, even with its rapid spread, the Coronavirus is similar to other illnesses. Several of those infected have recovered fully already, and COVID-19’s fatality rate is relatively in-line with many other diseases. As of Friday morning, there are over 100,000 global cases, but the main concentration of deaths remains in China.

Even if the virus does not have as severe of an impact as many feared, it may still take a major toll on the global economy. Supply chains have already been disrupted, particularly as a result of China’s status as a major trading partner, and it may impact a wide array of industries.

Additionally, investors are still evaluating the potential demand impact of the virus. Should consumers hunker down and pull back on spending, then the question becomes not if growth will be hurt, but how badly and for how long.

Fed Lowers Rates in Unusual Intra-meeting Session

On March 3rd, the Federal Reserve (Fed) cut the federal funds rate by 0.50% to a target range of between 1.00% and 1.25%. Although a rate reduction was widely anticipated in the near future, the nature and timing of the move caught markets off-guard.

It is highly unusual for the Fed to conduct policy actions outside of its regularly scheduled meetings. The last time this occurred was during the depths of the financial crisis in October 2008.

Financial conditions have significantly tightened over the past month as equity and credit markets have declined. The Federal Reserve believes that by lowering interest rates, they may spark borrowers to take on credit, supporting economic growth. Still, it is unclear how much impact lower interest rates will have in spurring consumer spending and growth.

This worry has caused the yield on the US 10-Year Treasury to continue falling, temporarily falling below 0.7% for the first time in history. Markets are expecting weaker growth and additional interest rate cuts.  Without complementary action from other branches of government, the ability of monetary policy to combat supply chain disruptions and demand shocks from the COVID-19 impact will not suffice.

Joe Takes Back Front Runner Status

Earlier this week, voters in 14 states went to the polls for Super Tuesday, the biggest single day of voting in primary season for the presidential race.

In the Democratic party, former Vice President Joe Biden swept ten states, including Massachusetts, Minnesota, Texas, and more. Senator Bernie Sanders, the front-runner as of last week, won just four states in what was an unexpected showing.

The size and scope of Biden’s performance was inconceivable two weeks ago. Boosted by a key endorsement, Biden won last Saturday’s South Carolina primary in a convincing enough fashion to spur several key competitors to withdraw. Seeking to avoid a Sanders victory, those candidates strategically dropped out in time to endorse Biden’s candidacy, coalescing left-center support behind the former Vice President.

Tuesday night was a stunning victory for Biden, who markets consider to be the more business-friendly candidate. This drove a remarkable surge in US stocks, especially within the health care and pharmaceutical sectors. As Biden’s likelihood of winning the nomination increases, so does investor confidence in the health care sector, thanks to Biden’s relatively moderate policies, when compared to Sanders’ Medicare for All platform.

Tying It All Together

These major market-moving events have driven a roller coaster of a week for investors. While these quick, sharp turns in investor sentiment can be bewildering, they are not a cause for panic.

We view volatility as an opportunity to revisit client portfolios. Our processes are designed to take advantage of moments when markets become unhinged from reality. This active, flexible approach enables us to capitalize on specific industries and areas that present attractive buying opportunities.

As always, it’s important to focus on investing for the long-term, and as events continue to unfold over the next few weeks, or months, we will continue to look for opportunities as they present themselves.