What to make of the fastest 10% decline in history

by: , Portfolio Strategist, New York Life Investment Management; Multi-Asset Solutions team, Multi-Asset Solutions team, New York Life Investments

A significant increase in the spread of COVID-19 has triggered a market selloff. We were already concerned for the prospects of the global economy and anxious about market valuations at the start of the year. The uncertainty surrounding the spread of the virus has increased the risk that the economy underperforms pulling risk asset prices down with it. It has become clear (as we wrote in early February) that the coronavirus is now infecting the bull market.

Record setting decline in the S&P 500

Sources: Multi-Asset Solutions Team, Bloomberg, S&P, 2/27/20. Past performance is no guarantee of future results, which will vary significantly. *A 10% decline occurred intraday today 2/27/20, the record will officially set if the market closes below 3047.

This is only the beginning.

Many market participants have discussed the prospect of a V-shaped recovery – a short-term decline in economic growth followed by a rapid recovery. We find this hard to believe. At best, investors should expect a U-shaped hit to global growth – a stagnation before any eventual recovery – if not an even more prolonged impact.

Perhaps adding to the negative impacts, many economic indicators that investors traditionally rely on for an accurate read on economic growth will be meaningfully obscured. The current data coming out of China is not encouraging. Economic activity in China has begun to halt – the longer it takes for activity to normalize, the more impact to supply and demand.

As ever, no one knows how the virus and its economic and market impacts will unfold from here.  Factoring in Thursday’s pull back, equities look expensive and vulnerable to policy mistakes and shifts in sentiment. For evidence to that effect, we continue to monitor:

  1. COVID-19’s impact numbers and geographic spread
  2. Alternative proxies for economic activity
  3. The impending responses from governments and central banks.

Is it time to buy?

Normally, a 10% decline in the market offers a solid buying opportunity for investors. However, the hit to growth is likely significant, and the situation has the potential to worsen. We have been defensively positioned in our portfolio and we will maintain that position until more clarity is reached. “Buy the dip” is dead.

As we wrote earlier this week: if the contagion continues to extend to new regions, risk assets will continue to be negatively impacted. Emerging markets equity, highly cyclical and most acutely impacted by the virus, would be hardest hit. U.S. bond yields have already experienced meaningful declines, reflecting a global flight to safety. Currency volatility – with the U.S. dollar strengthening asymmetrically against emerging markets and particularly Asian currencies – will persist.

A note on investor behavior.

During times of volatility investors tend to run for the hills. Staying invested is often the best option for overcoming short-term market stress. If you’re confident in your strategy, maintain your position or even add to it as the market moves lower. Alternatively, if you need capital or decide to shift your allocations significantly in a volatile market, be aware of how market conditions will affect your trade.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solution’s (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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