BY: JOHN McCOLLUM
Chief Investment Officer / Argent Trust Company
The Argent Trust Asset Allocation and Strategy group continues to monitor and evaluate the current market environment and the global impact of the spread of the Coronavirus. As we wrote before, there is a great deal of information and speculation floating around about the severity of the virus and the potential impacts both for global health and the global economy. We still believe the best thing we can do is to focus on primary sources of information about the virus. We have updated some of that information below.
There continues to be significant volatility as both equity and fixed income markets around the world digest the latest news and refine expectations for economic impact. So far this week, the S&P 500 has declined slightly although the path to this point has included daily swings in excess of 3%. The volatility is not surprising given the lack of concrete information. Since recent highs in mid-February, the S&P 500 has declined about 12%. Bond prices continue to rally and the yield on the 10 Yr. Treasury has fallen dramatically to a record low yield below 0.75%. While these equity price changes are significant and have been rapid, they are not unusual in a historical context.
It seems financial markets, however, are beginning to assume more significant economic impacts. We shouldn’t assume, however, that all trading, and therefore securities price changes, are necessarily the result of a re-assessment of the impact of COVID-19. We have an upcoming election in the US which certainly could affect securities markets and valuations. Modern markets also tend to have a large volume of trading which is based on momentum, hedging, and other short term factors. Additionally, volatility tends to create more volatility as fears and emotions take a larger role in determining daily securities price movements.
The latest economic data (this morning’s jobs report in particular) are quite strong. However, when the impact of telecommuting, reduced travel, school and business closings and other measures taken to try to limit the spread of the virus begins to show up in reported data, we will almost certainly see the effects. We still cannot determine the near term impacts of these measures. We also cannot determine how long the impact of these measures may last.
As we said before, when investing, we know there is always the possibility for unforeseen adverse events. History and experience has taught us that being willing and prepared to tolerate volatility allows investors to better benefit from long term growth and compounding. The best way to prepare for the appearance of an event or period of uncertainty is to develop an investment plan which considers time horizons and risk levels. We know there will always be volatility, we just don’t know when it will occur, what will trigger it, or how long it will last. We will look for ways to benefit from the volatility when opportunities are presented.
As securities valuations have risen over recent years, in some cases faster than underlying earnings growth may have warranted, we have advised investors to be diligent in reviewing their asset allocations and reconfirming their time horizons. Our portfolio managers are already carefully looking at opportunities which may be created by the selling and market declines while being mindful that there is much yet to be known about the extent and impact of the spread of this virus.
We will continue to monitor the situation and keep you updated.
What is the Coronavirus?
“Coronaviruses are a large family of viruses that are common in many different species of animals, including camels, cattle, cats, and bats. Rarely, animal coronaviruses can infect people and then spread between people such as with MERS-CoV, SARS-CoV, and now with this new virus (named SARS-CoV-2).” (1)
What we know:
- Approximately 95,000 cases so far globally; confirmed cases in 86 total countries; c. 15,000 outside China with these numbers rapidly changing; vast majority of new cases are being reported outside of China (4)
- The CDC has reported community spreading in CA, OR, and WA and there are numerous other states with reported cases.
- We previously noted the following about the severity of the illness:
- Most people who become infected experience mild illness and recover, but it can be more severe for others. (2)
- WHO Director General reports the fatality rate is between 2% and 4% in Wuhan, and 0.7% outside Wuhan. (6)
- It takes between 2 and 10 days before people who are infected become sick and develop a fever (4)
- The latest commentary from the CDC on the severity of the illness: The complete clinical picture with regard to COVID-19 is not fully understood. Reported illnesses have ranged from mild to severe, including illness resulting in death. While information so far suggests that most COVID-19 illness is mild, a report out of China suggests serious illness occurs in 16% of cases. Older people and people with certain underlying health conditions like heart disease, lung disease and diabetes, for example, seem to be at greater risk of serious illness.” (1)
- Latest CDC situation update warns “More cases of COVID-19 are likely to be identified in the coming days, including more cases in the United States. It’s also likely that person-to-person spread will continue to occur, including in communities in the United States. It’s likely that at some point, widespread transmission of COVID-19 in the United States will occur.” (1)
- So, “by the numbers” the actual direct impact (sicknesses and deaths) have been very few (relative to global population); the bigger concern, for now, still seems to be the impact of the “containment” efforts
- While no vaccine exists, NIH announced Feb 25 that rapidly developed initial trials had begun in with an initial patient participant in Nebraska; we are not aware of any updates to these trials. (7)
- However, CDC warns the following:
- “It’s also likely that person-to-person spread will continue to occur, including in the United States. Widespread transmission of COVID-19 in the United States would translate into large numbers of people needing medical care at the same time. Schools, childcare centers, workplaces, and other places for mass gatherings may experience more absenteeism. Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths. Other critical infrastructure, such as law enforcement, emergency medical services, and transportation industry may also be affected. Health care providers and hospitals may be overwhelmed. At this time, there is no vaccine to protect against COVID-19 and no medications approved to treat it. Nonpharmaceutical interventions would be the most important response strategy.”
It is that last sentence, we think, that has frightened the markets with the implication of quarantines and other restrictions similar to what has occurred in China and other places and the economic impacts such measures may cause. We should expect continued volatility as news, good and bad, continues to be digested by markets. As previously stated, we will continue to monitor the situation and keep our clients and professional partners updated.
- World Health Organization
- Center for Disease Control
- National Institutes of Health
- Johns Hopkins Global Dashboard
- 1,5 CDC website https://www.cdc.gov/coronavirus/2019-ncov/summary.html
- 2,3,4 World Health Organization website: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/advice-for-public
- 6 WHO Media Briefing https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—24-february-2020
- 7 NIH Website https://www.niaid.nih.gov/news-events/nih-clinical-trial-remdesivir-treat-covid-19-begins