State of The Markets – February 24

Global equity markets closed lower today on increased concerns about the spread of Covid-19/Coronavirus. For the day, the S&P 500 fell –3.4%. International developed and emerging markets, as measured by the MSCI EAFE and EM indices, fell –4.0% and –3.8%, respectively. Reflecting investor demand for safe haven assets, the 10-Year Treasury yield fell to 1.38%, just six basis points (0.06%) from its all-time record low of 1.32% set in 2016.

Today’s market declines seemed to be the direct result of weekend news reports indicating that the virus is spreading beyond China. South Korea, Italy, and Iran all reported upticks in cases, and deaths, over the past 72 hours. It is likely the increase (and infection rate) in Italy has caused the most concern as there was some assumption Western countries would be better prepared to address and limit infection. South Korea is also concerning given its economic role as both a significant trading partner with China, and important producer of goods and services for global supply chains. The Iranian infections were primarily centered in the town of Qom and seemingly clustered on congregates at religious sites located there.

As we discussed in our recent Market Outlook 2020 meetings, this will continue to be an evolving story and the news is likely to get worse before it gets better. Further, headlines will likely drive the narrative in the short-term which is less than optimal.

To put the current situation in perspective (as of 02/24/2020):

• Global infections: 80,000 (of which 77,000 are in China)
• Global deaths: 2,600 (of which 2,600 were in China)
• Global recoveries: 25,272 ( of which 25,036 are in China)

It is important to add that the daily recovery rate is now trending higher than the daily infection rate; this could change as the virus reaches new population centers.

While 37 countries are now tracking known infections, as you can see from the numbers above this is still primarily a China issue. That said, one of the difficult aspects of this virus is the infection rate, which is about 2x that of the common flu. Further, the virus can be transmitted by asymptomatic carriers (those that show no outward signs of illness), which is unlike the common flu, making tracking and containment challenging. The death rate appears to be around 2% of those infected which is higher than flu-like infections but not high by pandemic standards. While any death is unfortunate, to put the above numbers on a relative basis, the US sees about 61,000 flu-related deaths a year.

While we did not expect the current situation, our Market Outlook 2020 included the expectation of increased market volatility. Equity markets, in particular are priced for continued economic expansion without much (any) room for disruption. Given the uncertainties tied to the current epidemic, there is increased risk that there will be measurable interruption to regional if not global trade and commerce. Despite today’s market activity, we continue to look to previous events (namely SARS and MERS infections) for guidance. And while those events did create market volatility they eventually passed without a lasting economic impact.

Should you have any questions, please do not hesitate to contact your local First Western team. We are also happy to answer questions, should you have them.

John Sawyer, Chief Investment Officer

David Stern, Director of Investment Research

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