• Market in Turmoil. Volatility continued to dominate equity markets.  The continuing Covid-19 coronavirus outbreak, paired with the decision by Saudi Arabia to increase oil output to start what is effectively a price war for crude oil, catalyzed the incredible volatility in the stock market.  Investors rushed to sell stocks and buy U.S. Treasuries, at one point pushing yields of the entire Treasury note and bond complex below 1% for the first time in history.

• Covid-19. The coronavirus outbreak continues to unfold across the globe as the World Health Organization officially declared the outbreak a pandemic.  At time of writing, the number of cases in the U.S. climbed to over 3,600 across 49 states.  Elsewhere, Europe is now considered by the WHO to be the “epicenter” of the pandemic, with Italy, Spain and France as the primary hotspots.  In Asia, aggressive moves by the Chinese and South Korean authorities appear to have met a degree of success, with infection rates dropping inside the country.

• Nation on High Alert. We are observing, in real time, that the public is taking the infection threat with increasing seriousness.  Traditional and social media are doing their part in spreading awareness on the importance of hand-face hygiene, as well as personal distancing.  Businesses, both big and small, are doing their part by encouraging remote work and the temporary shuttering of retail stores, bars, and restaurants.  Nationwide, large conventions and gatherings have been cancelled, and all major professional sports season are on some degree of suspension.

• Policy Response. In an unprecedented move, the Federal Reserve announced it was cutting interest rates by a full percentage point to near zero, and relaunched its bond-buyback program in an effort to battle market uncertainty.  The moves mark the first time in history that the Fed has taken emergency rate cuts twice in between scheduled meetings.  Meanwhile, president Trump declared a state of emergency, making more federal funds available for states and local authorities, along with supplies, personnel and other support.  A bipartisan bill aimed at providing paid sick leave is also likely to be passed, and the idea of a payroll tax holiday is being floated.

• Outlook for 2020. The coronavirus has delivered a demand and supply shock to the global economy.  The U.S. entered the moment from a position of strength.  But corporate earnings and economic activity are likely to contract at least through the second quarter of 2020, and a brief recession is possible.  The economic shock of the outbreak will be large, but in contrast with the 2008 financial crisis which had lasting scars on the economy and sentiments, we should recover vigorously as we move beyond the coronavirus outbreak.  The market’s selloff has presented multiple investment opportunities that have come on sale.  We expect to be picking up some great companies for our investment portfolios, for your benefit.

Christopher Lai

Senior Portfolio Manager

03/16/2020