The stock market slide continued today, down over 4%. We’ve now entered official correction territory with the market dropping over 10% off its high from just a couple of weeks ago. The sell-off has triggered a surge in capital flows to safe-haven investments, driving up the price of government bonds, as the yield on the 10-year treasury is now at a record low, hovering below 1.3%.
It is still unknown how the Coronavirus outbreak will play out globally. All nations are vigorously working to reach containment, including taking extraordinary efforts on travel bans and quarantines. The response has been much faster than with past epidemics but has not stopped the significant negative short-term effects on the Chinese economy which are now spilling over its borders to its trade partners.
Knowing that the virus news may get worse, especially considering that a woman in Northern California with no recent travel history has been diagnosed, we have been monitoring many news and data sources. We continue to analyze our stock and fixed income allocations in preparation for such a worsening situation—both structurally and tactically. Currently, the data continues to support our view that the virus’s effect on the markets is short-term and doesn’t pose a prolonged concern. For example, the Leading Economic Index is still predicting that we are at least 12-24 months from our next recession. The positive forecast is largely due to the current strength and resiliency of the U.S. Consumer.
Also, while the stock market is struggling, many of our fixed income investments have experienced positive returns. And our private real estate and debt instruments continue to pay solid income streams. These diversified investments coupled with the strong stock market performance we’ve experienced over the longer term, allow us to consider rebalancing from strength into any weaknesses or opportunities in the stock market or other asset class once the current volatility subsides. For instance, the following is a chart provided by PIMCO with their analysis of the credit of various sectors. We believe these sectors may eventually present opportunities for high-yield bonds along with stocks through closed-end funds and exchange-traded funds.
For now, while acknowledging the uncertainly that remains, the Coronavirus has not changed our long-term expectations. Therefore, we are not making any immediate changes but are constantly monitoring the outbreak and any news which could change our expectations and the need to move to a more defensive positioning. We are hoping for containment and evidence to underweight the outperforming fixed income while overweighing certain risk assets.
As always, we appreciate your trust and please do not hesitate to contact us with any questions or to discuss your financial situation.