The fears surrounding the
COVID-19 (Coronavirus) outbreak has caused bottlenecks in various industries that may lead to a stagnating GDP growth over the first 2 quarters of 2020 globally. It appears that the virus will have an impact a bit greater than a standard flu season. While the bulk of the population appears to be at minimal risk, those with reduced immune functions may be susceptible to greater harm. Most epidemiologists agree that precautions are necessary but overall global impact is still relatively small.
However, global fears have already begun to impact many economic areas. We are already seeing slowdowns in the tourism and travel industries in addition to supply chain disruptions. Fear in markets tend to lead to more fear. Market forces based on panics lead to increased volatility. This presents challenges along with great opportunities.
The bond markets have seen a tremendous influx of investment over the last two weeks. This has resulted in increasing bond prices which in turn has created record low yields. As of the evening of Sunday March 8th, 2020 all US Treasury yields were under 1% including the 30 year. In fact, the US Aggregate Bond Index is up about 13% from the lows of September 2019.
Low yields on bonds present an opportunity. The increasing value of the bond portion of most portfolios serves as a counterbalance to decreasing equity values. We believe as bond prices increase, it is prudent to take some gains in this asset class to begin targeted cherry picking of equity asset classes at lower valuations. Essentially, we would be selling bonds at high values and buying equities as they decrease.
Separately, there are areas of concern in the bond markets. As the economy readjusts to slower growth or even a recession in the first half of 2020, corporate bonds may prove a risky bet. Companies may become strapped for liquidity as some are unable to cut expenses fast enough to make up for the stalling revenues. This is especially true in airline, hotel, and other travel and tourism companies. This may warrant reducing these types of holdings from bond portfolios to remove unnecessary risks.
We are analyzing the changing variables daily to make sure we protect portfolios from long term losses while taking advantage of the various opportunities the fear and volatility creates. As all portfolios are different based on individual goals and needs, we think it prudent to contact your investment professionals for detailed information about how this may affect your investment mix.
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