Stocks See Red as Coronavirus Fears Persist

Here is a look at some key factors we are watching, both here and abroad:

Economy

• U.S. data reports have suggested a mixed, but moderate pace of growth in early 2020, with some benefit from unseasonably mild weather, according to Chief Economist Scott Brown. Consumer spending should remain supported by solid fundamentals (e.g., job growth and wage gains), but increased uncertainty could undermine business investment over the near term, he added.
• If the virus spreads widely across the U.S., the economic impact would be temporary but potentially severe. We believe recovery would take months instead of weeks.
• Until recently, Federal Reserve officials had maintained that the stance of monetary policy remains adequate. Chair Jerome Powell issued a statement on February 28 noting that, while the fundamentals of the U.S. economy remain strong, “The coronavirus poses evolving risks to economic activity.” The Fed is now expected to lower short-term interest rates at the March 17-18 policy meeting.

Equities

• Cyclical sectors with the largest exposure to China (e.g., Energy and Industrials) were some of the hardest hit, while defensive sectors like Real Estate and Utilities fared better, explained Chief Investment Officer Larry Adam.
• Will investors view the impact on earnings as a temporary setback or as a reason to lower valuations? Mike Gibbs, managing director of Equity Portfolio & Technical Strategy, leans toward the former. “We are not willing to punish healthy business models for missed earnings due to a temporary event,” he explains, as the situation is different from earnings weakness due to deteriorating business models or missteps by management.

International

• Global equity markets declined in February, although unsurprisingly fixed income markets sharply rallied – said European Strategist Chris Bailey.
• Concerns remain about the virus’s potential impact on international supply chains, as pockets of outbreaks pop up outside China, although progress is being made in China to contain the spread, he noted.

Fixed income

• As mentioned briefly above, bond markets have rallied, hastened by coronavirus uncertainty. Treasury bonds climbed significantly, bringing yields down, according to Doug Drabik, managing director for fixed income research. Both the 10- and 30-year Treasury yields have reached historical lows.
• Central banks may be forced to engage in deeper accommodative actions. Should the world’s central banks pump even more money into the system, it may keep rates in a downward trajectory going forward, Drabik added.

Your advisor will continue to watch for movements that may affect your financial plan. In the meantime, please reach out to him or her if you have any questions.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. The process of rebalancing may result in tax consequences. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Chris Bailey is with Raymond James Investment Services, an affiliate of Raymond James & Associates, Inc. and Raymond James Financial Services, Inc.

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