The Coronavirus is raising the fear factor, impacting the markets in a big way. This week has seen historic market moves, with 1,000-point swings in the Dow and a precipitous drop in the 10-year Treasury yield as investors rush to safety.
On Tuesday, the Federal Open Market Committee (FOMC) issued a rare emergency rate cut in response to evolving economic concerns stemming from the Coronavirus. While the Fed slashed the federal funds rate by a half a percentage point (0.50%), Chairman Powell reiterated that the underpinnings of the U.S. economy remained intact. Economic numbers released today, while revised down, were still better than expected and confirmed that stability. The virus, however, poses threats to near-term economic growth and the situation has become “fluid”.
The Italy outbreak raised fears about widespread contagion of the Coronavirus across Europe. At home, escalating spread of the virus is causing significant and growing anxiety while a reported decline in the number of new cases in China may be a positive sign that the worst is over at the epicenter. Remember, emotionally charged events like this virus can often exacerbate perceived market risks. History suggests, however, the longer-term impact of health scares is limited.
Despite better than expected Q4 earnings, several companies have now issued warnings that the virus will have a negative impact on future profits. Apple and Microsoft are two high-profile firms to cut their growth forecasts. The Fed’s rate cut may be perceived to benefit some businesses, but multinationals with overseas supply chain issues will likely face headwinds. It’s worth noting, economic activity in China is slowly returning to normal. While data coming out of China may be suspect, U.S. corporations are reporting Chinese manufacturers and suppliers slowly returning to work, and retailers reopening previously closed locations.
We all need to keep in mind that the Fed cannot develop a vaccine, and has limited power to fix broken supply chains brought about by the virus. So, while money just got cheaper, the economy still faces a world of unknowns, and volatility will continue.
Timing the market now is probably a fool’s errand. Globally diversified portfolios aligned with client goals and risk profiles remain the most prudent (and proven) way to capture the long-term returns of the markets. Patience is still the order of the day for investors. We encourage everyone to contact your Tompkins advisor if you’d like to discuss your financial situation further.