Global financial markets lost over $5 trillion in value in the last week as the novel coronavirus spreads worldwide. Italy was a major surprise with the government reporting an explosion of new cases, up from two cases to over 100 in a matter of three days. Florence was hard hit, with many U.S. universities canceling their “study abroad” programs in the region and calling for their student's return while scrambling for alternatives. Outbreaks on the West Coast of the U.S. and Iran were also reported with the latter having the most deaths from the virus outside China. What will this mean for investors?
Two weeks ago the virus had been nearly completely contained in China and that was a positive sign. Now, it appears, the virus’s spread will continue to get worse before it gets better. While the acceleration of the spread slowed in China in recent days, international exposure and the fear it has caused has led to a broad sell-off in financial markets. The first two trading days of this week in New York have witnessed losses in the thousands of points, wiping out trillions of dollars of value with no end in sight.
Politicians are doing their best to calm markets and the public but as the death toll and infections increase, so too does pandemic anxiety. If you believe in a “V-shaped” recovery, one where the losses are quickly recovered from, buying into weakness and holding on to assets makes sense. If you believe in a “U-shaped” recovery or period of prolonged weakness before any pickup, or even an “L-shaped” recovery, where weakness is sustained indefinitely, a flight to quality might be best. Gold is on a record tear up nearly 10% since the virus was first reported. Emerging market currencies have been especially hit hard, although tempered with falling energy prices. A slowdown in global consumer demand may very well be the first domino that kicks off a broad sell-off in markets, long overdue in this decade long bull-run. In times of crisis, liquid assets generally appreciate, but what if there really is a “U shaped” recovery or even no recovery? What good is a piece of paper? I suspect the complete impact of this virus, should it continue to spread, has yet to be felt and policymakers have yet to plan accordingly for what is to come.
Following the democratic debate in the U.S. Presidential race last night in South Carolina, Bernie Sanders appears to be the candidate to beat. Michael Bloomberg has largely disappointed his supporters, and South Carolina is "do or die" for Joe Biden. This Sunday morning, the field of candidates will shrink, I predict, to four viable candidates, with Amy Klobuchar dropping out.