Last week, Wall Street experienced its worst crash since the financial crisis of 2008, which was almost immediately followed by a big ‘spike’ up on Monday in hopes of central banks coming to the rescue. U.S. stocks rebounded on Wednesday in the wake of the Federal Reserve’s surprise interest cut and support from other central banks. European shares also recovered from losses, and most Asian indexes ended higher than last week. However, the surprise cut still failed to inspire investor confidence in the Federal Reserve’s ability to counter the novel coronavirus, dubbed COVID-19, which has led to more than 95,000 illnesses and 3,000 deaths, primarily in mainland China.
The virus spread at an alarming rate outside China, across 52 countries with confirmed cases, leading to the first 10% correction of the S&P 500 since 2018. The volatility has spiked to an elevated level, bonds have rallied, and the decline in commodities helped stabilize portfolios. 10-year U.S. Treasury note yields fell to a new low of 0.936% on Tuesday, suggesting that investors are still looking for safe havens.
Like China, governments of nations with high numbers of reported cases are acting to limit the spread of the virus by cancelling major public events and imposing restrictions on travel. For example, in Japan, government officials have announced a month-long school closure nationwide. These efforts to contain the virus have a negative impact on both drivers of the economic activity — demand, as consumer spending is restricted, and supply, as production is slowed down.
According to the latest publication by the Organisation for Economic Co-operation and Development, the volume of corporate debt hit an all-time high of $13.5 trillion towards the end of 2019, and the overall quality of corporate bonds fell below levels seen before the global financial crisis in 2008. This makes the broader economy weaker and more exposed to the risk to any negative effects of an economic downturn.
The latest news out of China has improved as the number of newly reported cases has been slowing down. The companies that were out of operation in February have started to reopen. The disruptions caused in supply by factory shutdowns are starting to come back online. Like the Federal Reserve, the Chinese government recently cut interest rates to stimulate the economy and strengthen the supply and demand channels disrupted by the population and business sectors being subjected to travel and work restrictions. Additionally, the White House has created a Coronavirus Task Force and is closely monitoring the virus. Given the high debt levels, economic fallout from the virus, and its impact on corporate profits, it is prudent to expect volatility to remain elevated.
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