COVID-19 concerns are real. The best thing you can do is have a plan.

Our Top Market Takeaways for the week ending March 06, 2020.


Riding out the wave

Big wave surfers know the feeling of helplessness after a bad wipeout. A giant wall of water holds you under, tossing you around like a rag doll. You become disoriented, and don’t know which way is up. The pros will tell you that the most important thing in this situation is to remain calm; panic will make things worse. Eventually, the wave will recede, and your natural buoyancy will show you which way is up.

The last two weeks have felt a lot like that.

It can be tricky to balance the tone of these updates. The outbreak definitely feels different from a normal market freak out. We’re talking about human health and safety, after all. And it’s happening here in our neighborhoods, in our backyards—not just in some faraway place. Things become very “real” when you go over contingency plans, school gets canceled, or your vacation is disrupted.

But we are also reminded of the surfer caught in the wave. The importance of staying calm. Markets are already pricing in cuts to profit growth this quarter, and the full year. The bond market is pricing in a possible recession (we don’t see one yet, but it’s possible). We also take some cues from past outbreaks like SARS, MERS and H1N1. The truth is that the impact is most likely to be a short-term event (six months, one year?), rather than something that meaningfully disrupts a long-term investor’s plans.

While we’re still riding out this wave, let’s try to get our bearings:

  • The S&P 500 is now more than -10% off of its record high from February 19. The sell-off has also been broad-based: All S&P 500 sectors are in the red since the correction began in earnest. Energy *(-18.0%)* and Financials *(-15.2%)* have taken the hardest hit as crude and bond yields rock lower, while “defense-playing” sectors like Utilities *(-3.9%)* and Consumer Staples *(-3.8%)* have been sheltered from the worst declines.
  • Believe it or not, Chinese stocks are actually outperforming—the CSI 300 is +3.8% higher since February 19 versus the S&P 500’s -10.7% and the Stoxx Europe 600’s -12.3%. China is at the epicenter of the COVID-19 outbreak, and to be sure, its stock market did react, dropping almost -8% in one trading day as investors returned from the Lunar New Year shutdown. But as containment efforts ramped up and the pace of newly confirmed cases has started to slow, China’s stock market found an inflection point and has recovered all of its outbreak-related losses.
  • Volatility remains elevated. The VIX Index (a common measure of volatility in the S&P 500) is at its highest levels since 2011. Similarly, the MOVE Index (a similar metric for bonds) is at levels not seen since 2013.
  • Safe havens have rallied significantly. U.S. 10-year Treasury yields started the year at 1.92%... they’re now nearing 0.70%. We’ve seen yields fall about -40 basis points just in the last week—you have to go all the way back to 2008 to find a weekly drop in bond yields of that magnitude. Meanwhile, Gold continues its torrent higher, up about +10% since the start of the year.
  • After a long period of exceptionalism, the U.S. dollar has taken a recent turn lower. After years of acting as a shelter for investors, the DXY Index (a common gauge for the international value of the dollar) has fallen about -4% from February 20 to today.


So, which way is up?

Context and perspective are key. As we mentioned in our update on Wednesday, there’s been enough news this week to keep us busy for a while. We’ve seen the continued unfolding of the COVID-19 outbreak, the Fed’s surprise rate cut, and former Vice President Joe Biden’s comeback during Super Tuesday. Historically speaking, these events are not unique—we’ve seen global health scares, emergency central bank moves, and elections before. But for all the uncertainty that such events have brought investors over the years, stock markets have consistently moved up and to the right over time. The S&P 500 has never failed to regain a prior high.

The line chart shows the S&P 500 Price Index from 1990 through 2020, and marks the start of market corrections and bear markets, global health scares, Fed intra-meeting emergency moves and U.S. presidential elections. A key shows what event each number on the chart is referring to.

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What can you be doing?

While we certainly did not anticipate COVID-19, we have been reducing risk in portfolios over the last 18 months, given where we are in the economic cycle. In doing so, we have eliminated our overweight to equities, and at this time have a balanced position between stocks and bonds in portfolios. We’ve also eliminated our exposure to high yield corporate credit and increased our holdings of core and government bonds.

Volatility can also provide an opportunity to leg into markets, which are for the first time in months trading at a more attractive valuation. In this regard, we continue to focus on areas of high conviction—namely segments of the economy that have the potential to grow regardless of where we are in the business cycle (and the wild cards we might face). We feel that megatrends like digital transformation, healthcare innovation and sustainability are areas that will reward clients with a multi-year horizon.

With interest rates at record lows, consider taking advantage of this environment by borrowing and locking in lower rates. It can be as simple as refinancing a mortgage or taking advantage of the pullback to make tax-advantaged gifts.

At the end of the day, the best thing you can do is have a plan that is aligned with the intent for your wealth. Plans are built to withstand volatility and shocks such as these, and your J.P. Morgan advisor can help ensure you are taking the necessary and appropriate amount of risk to achieve your goals over time.

Michael Cembalest, our Chairman of Market and Investment Strategy, dug into these topics and more on Wednesday’s client webcast. If you missed it, you can catch the replay here.



All market and economic data as of March 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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