January started out like a continuation of 2019, then things took a bit of a turn. After rising about 3% in 2 weeks, the S&P 500 backed off ending the month with a small loss of 0.04%. Other parts of the equity market, most notably small caps and foreign stocks, experienced a similar pattern with a bit more downside volatility. Bond investors fared well, with the highest quality bonds rallying the most. The market for risky issuers was flat on the month, as rises in borrowing costs decreased bond prices but were offset by current income.
The story of the month was the coronavirus outbreak in China and fears of its spreading. We won’t pretend to be experts on pandemics, but what we can say is the fear of and response to the virus are escalating quickly. Major US airlines are cancelling flights to and from China and major food chains are closing restaurants or limiting hours.
At this point there are a lot of unanswerable questions from an economic perspective. How big of an impact will this have? How long will it last? Is this a modest economic hiccup or something more significant? What, if anything, should policymakers do from a fiscal and monetary perspective?
It seems to us that there should be a noticeable effect on business and trade, at least in the first quarter. It is too hard to make any predictions beyond that. Anyone making bold predictions at this point either does not know or does not know that they do not know. We would remind clients that those that seek lots of media attention tend to be known more for their boldness rather than their correctness.
Generally speaking, it is good for markets to go up and down. It keeps them healthy by keeping the animal spirits in check. We build our portfolios contemplating both good and bad times. What matters to us is that the outcomes make sense, given what happened in the market and we feel like that was the case in January.