5-Minute Huddle: Check

January 27, 2020

By Justin Pawl, CFA, CAIA

In this week’s edition:

  • As volatility returns to markets, an investment plan is imperative.
  • The coronavirus is spreading quickly – what should you do with your investments?
  • The first Fed meeting of the year will include new voting members, but no change in rates is expected.

Last Week Today. The International Monetary Fund (IMF) reduced its world growth forecast by -0.1% to 3.3% for 2020 and -0.2% to 3.4% for 2021. | Both the European Central Bank (0% with a -0.5% deposit rate – yes, Europeans are paying banks to hold their money), and the Bank of Japan (-0.1%) kept interest rates at current levels. | Conflicting updates on the spread/containment/spread of the Wuhan coronavirus pushed markets down, up, and then down again to end the week. | If you’d like to listen to my colleague’s podcast covering last week’s events, please click here.

Risk-off. International and domestic equities fell in sympathy for the week, with China, ground zero for the Wuhan coronavirus, bearing the worst of it falling more than -2%. Safe-haven assets like investment grade credit (VWETX +2.0%), gold (IAU +0.9%), and US Treasuries (TLT +2.9%) rallied in response. Speaking of US Treasuries, the yield curve is flattening again (the yields on bonds with longer-dated maturities have moved lower at a faster pace than shorter-dated maturing bonds), which is worth watching as a forecasting tool for future economic growth and inflation.

For detailed weekly, MTD, and YTD financial market performance, click on the table below:


Game Plan. Domestic equities fell around 1% for the week, which many have pointed out as the worst week since August 2019. Rather than look at the glass half-empty, a 1% weekly decline in equities is extraordinarily ordinary; the persistent ramping of the market over the last five months is far less common. Hence, last week’s 1% decline highlights that fantastic equity market returns since the end of summer 2019 have been accompanied by exceptionally low volatility. Might stocks go lower from here? Absolutely. For weeks, technical signals have been suggesting the market is overbought. But that doesn’t mean there will be a crash. A pullback of 5% – 10% is much more likely, as 10% declines occur 1-2 times per year on average. Nevertheless, there are two universal maxims about equity market declines:

  • Declines are normal, and the price investors pay for higher potential returns from investing in equities
  • Declines alter investors’ perceptions of risk, which can lead to poor decisions.

These maxims are why establishing and following an investment plan is vital. A plan provides a reference so investors can navigate choppy waters, avoiding poor decisions (behavioral or panic-induced) that lead to significant opportunity costs, and reduced wealth accumulation.

Check. In poker, a “check” is when you elect not to bet, but remain in the game, and the action passes to the player on the left. Checking gives a player an opportunity to gather more information about the other players’ hands, while preserving the option to play later in the round.

In a relatively slow week for economic news globally, the outbreak of the Wuhan coronavirus and potential financial ramifications for China and global growth, caused investors to sell first and ask questions later. There is no doubt that the coronavirus is a serious matter. The number of infected people and fatalities continued to rise through the weekend. A tragic reminder that despite humanity’s best efforts, nature is a powerful and ever-changing force that can dramatically impact our lives. At the same time, it’s too early to tell if the virus will have a meaningful impact on the economy or corporate earnings.

The coronavirus is one of more than a dozen outbreaks since 1980, and a look at the historical market responses to these types of events can help provide perspective. The tables below illustrate twelve of these episodes over the last 40 years and their impact on the S&P 500 and MSCI World equity indexes.


Sources: Dow Jones Market Data, Charles Schwab, and MarketWatch.

The pattern is relatively consistent in that the early stages of an outbreak are met with fear, which compounds as the virus spreads. Fear leads to market selloffs. Historically, the outbreaks are contained, and life returns to normal. Domestic equities have been less sensitive than their global counterparts to these outbreaks for two reasons: 1) epidemics tend to originate outside of the U.S., and 2) the U.S. economy relies more on internal consumption that most international economies. The pattern is relatively consistent in that short-term losses are typically reversed within 3-6 months both at home and abroad.

The coronavirus may turn out to be an outlier disease, bringing the Chinese economy to its knees and engendering a worldwide recession. However, it’s way too early to tell if that will be the case. For perspective, in 2002/2003, the SARS virus (also a type of coronavirus) infected over 8,000 people and killed 774. In the U.S. alone, there have been 142,000 hospitalizations and 8,200 deaths from the flu this season (National Foundation of Infectious Diseases). By contrast, the coronavirus has sickened 2,800 people in China and caused 80 deaths thus far. The Chinese government admits the virus isn’t yet under control, and there have been more than 40 confirmed cases in 13 countries outside of China.

Sadly, these numbers will continue to rise, as will anxiety with each new report of more infections and deaths. Yet, as an investor, it is better to “check”. Selling stocks now because of the coronavirus is a speculative bet on a disaster scenario. Buying stocks at this point is a bet that the market is close to bottoming. In periods of great uncertainty, investors are generally better served to do nothing, rather than charging into the chaos to make a big bet in one direction or the other.

Changing of the Guard. The first Fed meeting of the year this week includes the annual rotation of voting Presidents. The change is not expected to alter the dove/hawk tilt of the Fed as the one exiting dove will be replaced by another dove, and the two hawks rotating out will be replaced by two other hawks. The rotation is by design, but the equal exchange of hawks and doves is happenstance. Sometimes rotations produce a more hawkish Fed, and other times a more dovish one. Not this time, as summarized below:


  • Dovish – James Bullard (St. Louis Fed President), dissented in favor of rate cuts in June when the Fed held rates steady.
  • Hawkish – Eric Rosengren (Boston) and Esther George (Kansas City), both of whom dissented against interest rate cuts in 2019


  • Dovish – Neel Kashkari (Minneapolis), sometimes more Dovish than Bullard
  • Hawkish – Lorretta Mester (Cleveland) and Patrick Harker (Philadelphia)

The Fed is expected to keep rates steady at this meeting, underscoring their message that rates are “on hold” unless there is significant weakness or growth in the economy. The fact that this is a Presidential election year raises the bar further for a change in interest rates as the Fed goes to great lengths to minimize the slightest perception of political bias.

Be well,