Market Update – Coronavirus (March 22nd)

As you are all aware, financial markets experienced a very difficult week. Price volatility was at historical highs and financial asset prices suffered across the board. Having dropped 15% in the past week, the S&P 500, the benchmark US equity index, is now down -22% in March. Beyond the fundamental uncertainty about Coronavirus and its economic impact, market liquidity has also dropped meaningfully -- and this is significantly exacerbating market moves. Market prices move significantly as even few investors try to exit through an increasingly smaller door. In this market environment, investors who attempt to sell assets are severely penalized. If we know we have assets that have value, we should avoid selling them at such a time.

Financial markets are already pricing-in a contraction in global economic activity. Economic forecasts are continuously being downgraded. Most forecasters are expecting a negative first quarter of 2020, a moderate second quarter, and, as we pass the peak in the Coronavirus health event, a rebound in activity in the second half of the year. Recent global growth forecasts from some of the major global banks are as follows:

Source: Goldman Sachs, Morgan Stanley, JP Morgan, UBS

Government policy is now finally catching up with the virus. Governments are now super-focused on containing the pandemic and are taking aggressive steps on both health and economic fronts (in dealing with the virus, it would had been better if we had stronger global leadership and tighter cooperation between countries, however, unfortunately, international relations have gone more in the direction of Isolationism in recent years).

Despite economic policymakers’ best efforts, a sustained turnaround in financial markets will only come, I believe, once there are signs that Coronavirus is starting to fade. On this front, it was good to hear that for the first time since the virus emerged in China around two months ago, Hubei Region, the epicenter of the disease, managed to bring the number of new infections down to zero, and that Chinese authorities are now relaxing restrictions on the population even in this region.

Finally -- in my career of nearly 25 years, I have experienced several market crises. At the depth of every crisis, it always feels terrible. It always feels like there is no hope and that things will remain down forever. But they don’t. At some point, often unexpectedly, things start to move in a more positive direction. And usually, as the recovery process starts, markets move up very quickly and strongly. Having suffered losses due to a virus that has taken the world by surprise in a very short period of time, we want to be there when it happens.

We hope that the coming week brings with it more positive news on both the health and financial fronts.

I wish you all good health,

Eran Peleg