COVID-19, Oil, Interest Rates and Market Turbulence: What We Think
The news presents a more disturbing picture each day, from the NBA suspension to Tom Hanks to the British Health Minister. With the S&P 500 down -25% since its peak on February 19, 2020, this steep sell-off has many investors understandably concerned. It might be tempting to assume that the market’s dip into bear territory is caused solely by the widespread panic caused by the coronavirus. We see this current situation as an interplay between a couple of factors. It’s not just coronavirus, but oil and interest rates as well.
The World Health Organization has officially declared the coronavirus outbreak a pandemic. Here is a good, daily updated chart on COVID-19. If Chinese data is reliable, infection is on the decline there. In China, the government apparently has shut down all of their temporary coronavirus hospitals in response to the recovery. As we deal with the possibility that the US may see rising rates of infection, we are cognizant of the potential economic effect. We think the economic effects of the virus are significant, possibly more significant than the virus itself. We can appreciate the huge impact of colleges and public events shutting down and foresee the wide-ranging effects of the scare. The possibility of recession looms on the horizon, yet this situation is not as dire as 2000, 2008 or 1987.
We are keeping a close eye on the situation between Saudi Arabia and Russia. It’s related to, but independent of the COVID-19 outbreak. We think the OPEC collapse prediction seems premature. In an effort to affect US producers in response to the Nordstream 2 sanctions levied, Russia refused to play a part in reaching a solution. Reports are that OPEC will call an emergency meeting and resolve the matter. Consequently, oil will not likely stay this low, but lower oil costs are good for the consumer and help our economy.
We also see that fear has driven bond prices up, leading to all-time lows in bond yields. A balanced portfolio of bonds and equities is protected in times where funds flee from equities to bonds. That is one reason we are dedicated to asset allocation as a strategy.
Here are some takeaways:
- The prior 12 epidemics we have studied not only ended, but provided respite for market declines in 11/12 cases after 12 months
- The prevention efforts will likely have a slowing effect on corporate earnings and on the global economy
- Lower fuel prices, lower interest rates and Federal fiscal stimulus will help the economy
- In the meantime, this volatility will likely continue until we have more certainty, thus
- Having a solid plan is paramount, emotional responses can be your worst enemy.
We understand that these feel like dangerous times, and the rapidly cycling news reports don’t inspire a sense of safety. Your Sequoia team wants you to know that we remain vigilant. We have been through this kind of turbulence before. We’ve heard it said, “Panic is not a strategy – and nor is greed”. We believe this is true, so we’re focusing on the bigger picture. Financial planning and investing isn’t a short play, it’s a long-term strategy.
We’re here to help, please feel free to reach out to our team with questions and concerns by emailing email@example.com or contacting your adivsor directly.
President & CEO