The Coronavirus Market Impact

As COVID-19 cases emerged globally from east to west a material health crisis was transformed into an economic shock as world governments enacted strict containment policies and shut down many sectors of their economies. The precipitous rise in the number of coronavirus cases globally and the uncertain extent of the economic damage led to panic in markets, as well as forced selling of financial assets. Nearly all risk-asset prices came under pressure during the first quarter as correlations converged. Selling pressure was indiscriminate, which left Treasury bonds and cash as the lone safe havens. Even gold prices fell sharply as investors reached for all available assets in an effort to raise cash.

In fact, the speed of the risk-asset drawdown was faster than in 2008 as equity markets reached correction territory (-10%) and bear market territory (-20%) in record time. Historically, equity corrections and bear markets have taken months to develop. During this drawdown, major equity indices reached bear-market levels in a matter of days.

Economically, disease containment efforts have caused most economists to slash Q1 and Q2 GDP growth expectations in the U.S. and globally. Unemployment rates are expected to rise dramatically as well, with depression-like U.S. readings expected. We believe U.S. unemployment rates could peak above 10% and exceed levels witnessed during the global financial crisis. However, many forecasters are indicating a material economic rebound may follow in the third quarter. Any recovery should remain dependent on the length of government containment efforts. In such a rebound scenario, employment is expected to recover as well, but perhaps not as rapidly as GDP. While the expectation of some economic rebound in Q3 is positive, the potential long-term economic damage as a result of the virus shutdown is justifiably keeping investors nervous.

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