February 25, 2020 - The uncertainty surrounding the coronavirus finally caught up to U.S. markets on Monday with key benchmark indices declining by about 4.3% over the last two trading days and opening today down around 1.0%. Although we can’t predict the severity of the coronavirus or its impact on the global economy and capital markets, we have observed in past epidemics, that while serious, they tend to be relatively short-lived.

The economic repercussions of the coronavirus and its impact on Chinese and global business activity will no doubt cause China’s first-quarter growth to fall short of forecasts. However, assuming the virus can be contained and does not spread significantly beyond the Asia-Pacific region, we expect the Chinese economy to rebound quickly with at forecast growth over the remainder of the year.

Amidst investors’ legitimate concerns about the potential global spread of the coronavirus, we wonder if there is not also an element of profit-taking associated with yesterday’s sell-off. U.S. markets recently reached new record highs while bond market yields have continued to fall, suggesting that U.S. stocks are riskier than equity investors realized. It is also worth mentioning that U.S. equity’s year-to-date return, inclusive of yesterday’s decline, is essentially flat after returning a remarkable, and in our view, unsustainable 31.0% in 2019.

While we pray the coronavirus can be quickly contained, sparing further loss of life, this epidemic demonstrates the importance of strong diversification within investment portfolios to protect against the unforeseeable risks that can quickly grip the capital markets.

  • After reaching new highs, U.S. equity markets declined by 3.3% on Monday on what we believe was a coronavirus inspired sell-off.
  • Simultaneously, the bond market rallied, with yields on longer-term U.S. Treasuries at or near record lows as investors sought safety amidst the market’s uncertainty.
  • In contrast, HighGround’s Capstone Endowment Fund, one of our three predesigned endowment solutions, was off by 1.4%, demonstrating the advantages of strong diversification during short-term market disruptions.
  • In keeping with our long-term endowment management philosophy, we plan to maintain portfolios in tight compliance with policy parameters.