Photographer: Kazuhiro Nogi/AFP via Getty Images
This past week investors finally came to terms with the reality of COVID-19, triggering a stock market correction that brought the S&P 500 down from 3,260 to 2,856, the depth’s of Friday’s lows- a drop of nearly 13%. The Dow had a similar trajectory, falling from all-time highs above 29,000 points down to its own Friday low of 24,690, a drop of nearly 15%.
The catalyst was ostensibly the sudden outbreak of coronavirus cases in Italy, which caused investors to realize the disease is getting closer to home, sparking panic selling. A deeper issue, however, is the disruption COVID-19 is creating within global supply chains and on consumers and travelers, which is sure to negatively impact many companies’ 1Q 2020 earnings. Although the Fed is considering taking action to bolster the economy in the midst of continuing unease, this may not be the appropriate action to take. What is needed is a fiscal response- stimulus injected in the areas and industries that need it most- not a monetary one.
An unexpected development arising from the current market turmoil is the stifled performance of gold. After reaching 7-year highs on Tuesday, it fell lower throughout the rest of the week until falling still further on Friday. Although gold is thought of as a “safe haven” asset that appears to be inversely correlated to equities, it is actually more so hedge against inflation. One main reason for its recent decline is the fact that many investors were given “margin calls” triggered by their equity losses, and in order to meet their collateral calls they were forced to liquidate their gold positions. To wit, it was reported that several billion dollars worth of gold came onto the market late in the week, pushing gold prices lower.
The drop in equities is unprecedented- it is the fastest 10% pullback from a high in history. Although the White House insists this is a temporary plunge, and Larry Kudlow, director of the National Economic Council, stating that CEOs have made no mention of supply chain problems, investors are still anxious, pushing the 10-year Treasury bill to a record low of 1.15%. Companies around the world are cutting production and canceling conferences, increasing the odds of a global recession.
We will see in the upcoming week what the White House and the Fed do in reaction to these developments. What is certain is that economic uncertainty will persist as the novel coronavirus makes its way beyond China and into the rest of the world.