With news of the number of coronavirus cases outside of China increasing, the markets in February had one of the worst weeks since the 2008 Financial Crisis. The worst-performing sectors for the week were energy, financials, and materials. The best-performing sectors were communications, consumer staples, and health care.
As a result, the major indices ended February with the Dow Jones Industrial Average -9.75%, the S&P 500 -8.23% and the Nasdaq Composite -6.27%. International stocks also declined with the developed foreign markets measured by MSCI EAFE closing the month -9.04% and MSCI Emerging Markets closing -5.27%.
Federal Reserve Chair Jerome Powell issued a statement on February 28th that the Fed would “act as appropriate to support the economy” and by Tuesday March 3rd issued an emergency cut of 0.50%. While the interest rate cut cannot do much to mitigate the disruption to the supply chain caused by the coronavirus it can help ease recession fears.
As for the Bond market, the concerns of the coronavirus pushed yields to historical lows, with the 10-year Treasury hitting a low point of 1.02%. The Barclays US Aggregate ended February up 1.80%.
The US economy started the year on solid footing with the economy growing by 2.3% in 2019. The estimated fourth-quarter gross domestic product was released at the end of February at 2.1% annualized, which was in line with estimates. Consumer confidence remained strong in February and new home sales increased 7.9% beating the expectation of 3.5%. The economic data remains stable despite recent negative sentiment driven by the coronavirus.
There are some important concepts to consider when evaluating your investments during the recent volatility in the market. Volatility is a natural occurrence in the investment markets and can help investors recognize if they are in the accurate risk objective. If an investor’s first tendency is to sell and go to cash during the recent volatility, it is likely they were taking more risk than they could handle.
Also, taking into consideration the time horizon for the account can help to put volatility in perspective. If an investor has a long time horizon, they are likely better off staying invested in their current objective rather than trying to time the market. Investors are more likely to lose money trying to plan for a correction or market timing than they would have to stay the course.
The importance of diversification and negative correlation was confirmed during the recent volatility with many of the portfolios losing less than we would have expected given the risk objectives.