Assessing the Coronavirus: A New Source of Uncertainty for Global Markets

In January, we highlighted signs of green shoots in economic data—learn how recent developments affect our outlook.

Executive Summary

  • As a result of the current economic backdrop and accommodative central bank policy, we expect a short-lived contraction as we believe near-term economic data will be weak, but ultimately rebound later in the year.
  • While the magnitude of the recent market selloff is certainly nerve-wracking, it is important to note that this market cycle has survived several periods of significant uncertainty and market volatility.
  • While risk is generally skewed to the downside, we are also beginning to see pockets of opportunity—this is particularly true in the IG credit and high yield markets where, similar to the fear-based sell off of December 2018, we are finding select opportunities to purchase oversold credits with robust fundamentals.

Global Markets: The Impact to Date

The rout in equity and credit markets as a result of the new cases of COVID-19 (Coronavirus) accelerating globally has caused significant selling pressure across virtually all risk-related asset markets. The data from Johns Hopkins University’s Center for Systems Science and Engineering paint a picture of stabilization in terms of new cases of the virus reported in China. However, new cases outside of China are accelerating, which in turn has caused a widespread selloff across global risk assets.

The initial selloff started in emerging markets. However, as the virus spread to other countries, U.S. markets have quickly followed suit. In just ten days, the S&P 500 went from a record high to a correction of over -10%. Corporate credit markets have also experienced meaningful volatility and yields for the 30-year and 10-year Treasury reached all-time lows.

How Does the Virus Affect Our 2020 Outlook?

In January, we published our investment themes for 2020, highlighting signs of green shoots in the economic data arresting the slowdown that began in 2018. Our outlook focused on the monetary policy response that unfolded in 2019. A look at the decline in global short-term interest rates prior to the COVID-19 outbreak was an important source of steam that was in the pipeline, and remains so today, in our view (Figure 1).

Liquidity aggregates have been improving. Some of our longterm fundamental indicators turned positive in early February for the first time since May 2018 and inventories were declining. As of today, we see COVID-19 as a shock to the economy. If the COVID-19 morphs into a global pandemic, we believe the signs of emerging positive trends in the global economy will evaporate. If the virus can be contained, then global growth can recover after recessionary readings for the first quarter. In our view it’s the next two to three weeks that the narrative will unfold.

Figure 1. Global Central Bank Policy Remains Supportive of Growth

Figure 1. Global Central Bank Policy Remains Supportive of Growth

Source: Cornerstone Macro. As of 1/31/20.