Just days ago, investors were cheerful as US large cap stocks were at all-time highs. Fast forward to today to experience the quickest 10% fall from all-time highs on record. What’s caused the sharp reaction?
The bulk of the weakness can be attributed to the spread of COVID-19 (a.k.a. coronavirus) around the globe, including in the US. Along with the tragic human toll comes uncertainty and speculation about the duration and severity of supply chain disruptions, corporate profit warnings, and potential government policy responses.
Supply chain disruptions kicked off the economic worries in January with dramatic decreases in raw material shipments as well as an unprecedented amount of labor quarantined at home in China. As a follow-through, aggregate US large cap earnings forecasts for 2020 started the year near 10% but several have slashed their estimate to zero this week. A monetary policy response such as a Fed rate cut would typically be seen as a given and a positive development; however, there is skepticism about how much rate cuts can help with a supply-side shock and how much is already priced in. Lastly, the Fed has recently signaled no expected rate changes in 2020, partly to avoid perceived political repercussions in a Presidential election year.
On the positive front, current headlines out of China are more encouraging with new cases falling to multi-week lows, relaxed restrictions on travel, and some factories resuming operation.
USAA Portfolio Management’s Thoughts and Actions
The coronavirus is the ninth major epidemic that has broken out over the past 20 years. Prior epidemics moved stock and bond markets in the expected direction due to increased uncertainty; however, rarely have they had a lasting impact and they have never caused a global recession. China, the origin of the epidemic, accounts for a much larger portion of GDP compared to SARS in 2003, which leads to increased scrutiny and volatility for this event.
Market reaction has been swift on negative virus headlines, but the S&P 500 is only slightly negative on the year and at levels last seen only 4 months ago. In addition, diversification into fixed income and alternative asset classes has worked well during this downturn due to bond yields falling (prices move inverse to yields) to all-time lows.
For members invested through our USAA Managed Portfolios program, our tactical positioning is neutral stocks versus bonds. We sold US small cap in favor of US Treasuries on February 7 in part due to COVID-19 slowdown concerns. Current asset class holdings include US large cap, International Developed, US Treasuries, and US investment grade corporate debt. We continue to monitor economic indicators, including earnings expectations and PMIs that might show signs of change due to the virus.
What You Need to Do
Our guidance is to remain focused on the long-term investment plan that you have put a great deal of thought into. Volatility can be an opportunity to revisit your asset allocation plan and reallocate back to your target allocation.
FOR PUBLIC DISTRIBUTION
USAA Managed Portfolios – UMP® (UMP) is a managed account program offered by USAA Investment Management Company (IMCO), a registered investment adviser and Digital Investment Adviser (DIA) is an offering within the UMP program. Brokerage services are provided by IMCO, a registered broker-dealer, Member FINRA, SIPC and brokerage accounts are carried by National Financial Services, LLC, Member NYSE, SIPC. The UMP Brochure, which describes the Program, investment options, risks and fees, and the Brochure Supplement, which identifies supervised personnel responsible for advice, are available by calling 800-531-1345.
This material is provided for informational purposes only by USAA Investment Management Company (IMCO), registered investment adviser. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy, or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of IMCO or any affiliates as of the date provided and are subject to change at any time.