February Market Overview
February turned out to be a tough month for equity investors. While the start of the month was strong as the S&P 500 reached a new all-time high by February 19th, fears relating to the coronavirus gripped the market late in the month causing a sharp sell-off. Ultimately, the S&P 500 declined 8.2% in the month, though fell 12.8% from the high. The double-digit decline from the high marked an official correction (defined as a decline in excess of 10%).
Fixed income rallied, as heightened volatility drove investors to safe-havens and global growth concerns caused investors to contemplate lower interest rate policies from central banks. (Recall the inverse relationship between interest rates and bond performance.) In fact, in early March, the Federal Reserve reduced its target interest rate by half a percentage point in an effort to bolster growth. Notably, 10-year Treasury bonds dropped to a record low of less than 1%.
As we mentioned in our January note, the coronavirus is expected to weigh on global growth this year. Unfortunately, as the virus spread more broadly outside of China, the economic impacts clearly became more severe—though those impacts remain challenging to forecast.
Whether the market’s reaction was justified or not, our explanation of the sell-off is predicated on the following points:
- The coronavirus has caused real economic damage. In China, many factories closed for several weeks causing a ripple effect through global supply chains, while retail businesses closed their doors and consumers stayed home—all in an attempt to curtail the virus’s spread. Further, while travel restrictions were initially concentrated in China, the growing number of global cases has caused individuals and corporations to cancel or delay travel plans much more broadly. These dynamics are driving a reduction in profits across a broad range of publicly traded companies, creating a justifiable reason for the stocks to decline, at least to some extent.
- Investors despise uncertainty. With no way of knowing when the spread of the virus will abate, investors have a tough time gauging just how impactful the economic damage will be.
- An aged bull market with elevated valuations. We’ve seen headlines on and off over the last several years citing the age of the bull market, and investors have both questioned and feared when the inevitable correction would come to fruition. These concerns, combined with elevated valuations after the strong rally in 2019, left stocks ripe for a pullback at any sign of trouble.
- Related to the above, we believe the market exhibited some signs of indiscriminate panic selling, which is partially attributable to many market participants having extremely short investment horizons, as well as momentum-driven algorithmic trading strategies that exacerbate any downward pressure.
Although the coronavirus is driving a reduction in global growth this year, it is important to remember that this is likely a transitory scare and is unlikely to cause any structural, lasting impacts on the vast majority of companies.
We’ll conclude by both acknowledging that such dramatic volatility can be concerning for investors and reminding clients that our portfolios are designed to effectively balance risk and return over the long-term. While many investors panicked last month, we kept our heads down, closely monitored the situation and searched for potential opportunities.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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