Coronavirus Upsets the Markets - February 28, 2020
The headlines are swirling as markets react to the ongoing Coronavirus epidemic and resulting economic and policy fallout. Given the wild week, the team at GPA wanted to send out a brief update on what is going on in markets and update our outlook.
After hitting a fresh all-time high on February 19, the S&P 500 declined 12% while high-yield spreads widened by over 100 basis points (1.00%). The 2-year US Treasury yield finished the week below 1.00% while the 10-year and 30-year yields sit at historic lows. An interesting week indeed.
In response to the virus-induced malaise, markets moved to aggressively price in interest rate cuts from the Federal Reserve. As of Friday afternoon, markets are pricing in four rate cuts over the coming 12 months and price in a rate cut at the Fed’s next meeting on March 18th. Many of you may be reading this and thinking – what would rate cuts do to stem a virus? We agree with this sentiment, however we firmly believe the Fed to be in play to do whatever they can to calm markets and keep the credit channels flowing.
Credit spreads sold off sharply after hitting all-time lows on February 12, 2020.
Given the conditions driving markets, it is difficult to forecast where rates and risk assets are headed and how policy makers will ultimately respond. Therefore, we currently recommend clients stick with their strategy and keep their portfolio duration at, or near, their benchmark.
We also look at the current experience as a reminder to why we take the investing approach that we do. Establishing a safe source of liquidity combined with a core investment portfolio that seeks to invest out the curve is powerful when we face these unforeseen events that give rise to rapid market reactions.
As always, feel free to reach out to the team here at GPA if you have any questions.