Market Commentary: Coronavirus Fears Hit Market Hard

Jason Doiron
Senior Vice President & Chief Investment Officer
National Life Group

COVID19 + Lack of Cooperation = Markets in Distress

Over the past several weeks, financial markets have seen an increase in volatility not experienced since the 2008 Global Financial Crisis.  Markets have been impacted by significant uncertainty surrounding the potential spread of COVID-19 cases and the economic impact of efforts to mitigate the spread of the virus.  In addition, a significant increase in crude oil supply driven by a lack of cooperation among OPEC+ countries have led to shocks on both the supply side and demand side of energy markets.

Markets were largely unconcerned……until they were.

For the first seven weeks of the year, markets were largely unconcerned with the increasing number of Coronavirus cases, leading equity indices to reach record highs while bond yields remained relatively stable. On February 19^th, as equity indices climbed to record levels, there were still less than 20 known COVID-19 cases in the United States and Oil was trading at $53.29/barrel.  Since that time, market volatility has increased significantly.  This was first driven by increasing concerns around the spread of Coronavirus, causing equity markets to fall by 12% from February 19^th to March 6^th while the yield on the 10-year US Treasury declined from 1.57% to 0.76%.  The risk-off tone was exacerbated on March 6^th, as a lack of cooperation by OPEC+ countries created an oversupply in oil and led to the second major shock to financial markets.  This led the price of Oil to decline by nearly 25% as the 10-Year US Treasury yield reached a record intra-day low of 0.31%.  Finally, volatility was exacerbated by the WHO’s declaration of Coronavirus as a pandemic on March 11^th.

Will a government stimulus save the day?

More recently financial markets have shifted their attention to the economic impact of potential mitigation efforts.  Global travel has ground to a halt, large events are being cancelled, and those who still have jobs are having to work from home.  Market participants have been left scrambling to determine the magnitude of the shock and whether the global monetary and fiscal policy response will be enough to soften the blow.  As of Friday, the S&P 500 was down nearly 32% from its highs, and Oil was trading at $22.63/barrel, 58% lower than its February 19^th price.

High yield corporate bonds yielding above 10% for first time in many years. 

Risk premiums within credit markets have also expanded significantly, with many areas of the market reaching levels not seen since early 2009.  The Bloomberg/Barclays US High Yield Corporate Bond Index is now trading at a spread of over 1000 basis points for the first time since June 1, 2009.  Spread widening has been even more significant in areas that are especially impacted by recent events, such as Airlines, Energy, and Retailers.  More recently, many corporations have been drawing down their existing lines of credit to raise cash as uncertainty around both the availability and the cost of financing has increased significantly.

And we are keeping our promises. 

Over the past several years we have been actively de-risking our investment portfolio in anticipation of the eventual end of the longest economic expansion in US History.  We have meaningfully reduced our exposure to the riskiest parts of the credit markets while increasing our allocation to higher quality assets.  As a result, we are very well positioned for the current market environment.  As markets continue to reprice, we would look to add limited amounts of risk back to our portfolio when we feel that we are paid to do so.  As always, our strategy remains focused on our number one priority, which is keeping our promises.