The leap year is a fascinating quirk of the calendar, where every four years we see an extra day added to the shortest month of the year to keep the calendar well-aligned with the seasons. Investors could be excused for lamenting any extra time being added to this past month, as it was largely one many could not wait to see end.
Do you remember impeachment? It was only on February 5th, just over one month ago, that President Trump was acquitted in the Senate, bringing to a close a four-month process. The markets had largely already priced in acquittal as the expected outcome, so the major indices were relatively muted in their reaction. In fact, following this news and some other developments that investors had been awaiting, including China’s move to reduce tariffs on $75 billion of U.S. goods as of part of the recently signed trade agreement, both the S&P 500 and the Dow actually closed at new record highs on February 11th (Source: Bloomberg.com 2-11-20; Stocks Close at New High With Virus Concern Easing: Markets Wrap).
That now seems like decades ago.
The novel coronavirus had been lurking as a key concern since January, but as of the start of February had remained largely contained to China. That changed quickly, with cases emerging in Iran, South Korea, Italy, and a growing list of countries as the month moved along, until eventually it became clear that the virus had made its way to the U.S.
The last week of February saw some of the largest daily point declines in Dow Jones Industrial Average history, with a decline of 1,031 points on the 24th, 879 points on the 25th, a record 1,190 points on the 27th, before a 357 point drop mercifully took us into the weekend and that extra day of February on a Saturday.
In addition to the human toll, the coronavirus outbreak is likely to have a meaningfully negative impact on global economic output due to lower demand and supply chain disruptions. In our view, even as new cases are reported, we will need to see a slowdown in the rate of new cases worldwide before the market can begin to form a bottom.
Equities also were not alone in experiencing elevated volatility amidst coronavirus concerns. High yield bonds sold off, and commodities continued their struggles. The IHS Markit Flash U.S. Composite PMI Output, released on February 21st, contracted for the first time since October 2013; Services Business Activity dropped to a 76-month low; and Manufacturing PMI dropped to its lowest level in 6 months, suggesting weakness across several key components of the U.S. economy.
As we noted in our January update, the volatility and headline risk which marked the first month of the New Year did not have the appearance of being an outlier. Investors need to continue their vigilance, in terms of their own health and the health of their portfolios. Diversification remains key, and alternative exposures designed to mitigate volatility while keeping investors exposed the potential recoveries, will continue to be a powerful tool in the face of all that has been happening, and all that may still be to come. Thankfully perhaps, we are back to having our usual requisite number of days for the rest of this so far turbulent year.
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The IHS Markit Flash U.S. Composite PMI Output is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.
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