The Coronavirus is Making Investment Decisions for Investors
Investors were quick to sell their stocks and focus their resources into so-called "safer investment asset classes" such as gold and government bonds as the fears of the coronavirus epidemic continues to get worse and slow down economic growth. U.S. Treasury notes and bonds have been moving towards their all-time lows, the 10-year note hit its all-time low of 1.366% before closing at 1.470%. Historically, investors tend to shift toward gold when fearful. Gold was up 8.2% YTD and had surged seven straight market sessions to gain over 4%. Yet, even within this volatile market the S&P 500 is only 1.4% away from its former record that it hit on Wednesday.
There is a lot of inquiries on how the world economy will be affected by the coronavirus, which is now affecting consumer spending, manufacturing and companies supply chains. Certain slowdowns in manufacturing are believed to already be affecting many large, multinational companies that produce their products in China.
“One’s telling you that things are great in the world. The other market is telling you that things are not great in the world,” said Giorgio Caputo, from J O Hambro Capital Management, when speaking of the fluctuations in the fixed income and the equities markets, “One market is going to be right.”
Investors are not willing to let go of this unprecedented decade long bull market and there are very few economists who believe there is an imminent recession on the horizon due to the pandemic. There does not appear to be anything that can halt "The Great Jubilation" for investors.
There are quite a few things that do not make sense to some investors who have been watching this unique market. So far this year, the top two performing sectors in the S&P 500 have been technology and utilities. Historically, these move in opposite directions based on investor risk appetite. Investors who are speculating on the tech sector have higher risk tolerance and investments in the utility space suggest that they are fearful of the future.
The end of 2019 showed that there were concerns that the US economy would tip into a recession, but those fears have been pushed to the side as the U.S. and China seemed to reach a trade agreement. Still, there has been a myriad of weak economic data and significant uncertainty about what kind of influence the virus will have on the already hurting Chinese economy and corporate earnings growth.
The gains in both the equity market and alternative, safer investments are pointing towards investors being split on where they think the market will be in the future. Normally, investors do not buy safe investments as the market is consistently producing new record highs over the past decade.
“It’s absolutely unusual from a longer-term historical perspective,” said Katrina Lamb, head of investment strategy and research at MV Financial. “There’s a concern in terms of wondering if we may be heading into a stretch of trouble after this very long, gentle, benign rally.”
Are we starting to see the first fissures in the wall that is propping up the economy? Apple, the first U.S. company came out on Monday to say they would not meet their past guidance and ended the week down almost 4%. Nevertheless, Apple which manufactures a large number of its products in China has warned investors that the quarantines caused by the virus have limited iPhone production. Apple is far from the only company that will be harmed by the restrictions in Chinese cities and also by China's economic slowdown.
The U.S. has its own economic concerns as some information is showing that there may be a slowdown nearing as one of IHS's indicators that measures manufacturing and services dropped to its lowest level in over six years which made government bond yields fall under 2%. There is also new data on the real estate market showing that existing-home sales decreased by 1.3% in January from December.
The great Goldman Sachs analysts went out on a limb and cautioned in a research letter that “the risks of a correction are high.” The analysts also warned that equity investors may be too upbeat about corporations’ capability to endure the epidemic. Yet, investors are confident and say they still anticipate greater gains going forward for stocks.
“People are desperately looking for organic growth and High-growth stocks should prosper,” said Dev Kantesaria, founder of Valley Forge Capital Management.