You need to understand what’s going on with Coronavirus. You need to know how it’s impacting the markets. Strange things are happening in the bond market, and the yield curve has inverted up to the One-Year Treasury. The Two-Year Treasury is not quite there yet. Today we’re going to do things a bit differently with Jason Newcomer, one of our CERTIFIED FINANCIAL PLANNERS® joining me today.
What’s happened in the markets with past epidemics like the Coronavirus?
DEAN: Alright, Jason, so when we think about what’s going on with the Coronavirus, you can’t turn on any news channel without having people talking about the Coronavirus. People are freaking out, they’re scared to death, and the market seems like it’s in a freefall. We want to put this in perspective for people. So, you created a chart that I think is worthy of going through. So walk us through this chart. What was on your mind when you put this together?
Market Dips Since 2008
FIGURE 1 – YCharts.com
JASON: So, when a headline is driving emotions in the news and driving markets, we don’t know what’s going to happen in the future. We don’t know how bad Coronavirus is, and I don’t pretend to be an expert in microbiology or pathology. What we can do is look at the past and headlines or examples of typically negative news events that have happened and how they driven markets. Looking back to 2008 and digging through old newspapers, old headlines, websites. I found a lot of things that, if they happened, you would generally expect there to be some sort of a negative impact on the stock market, at least in the immediate period.
DEAN: Alright, so let’s, let’s go through Figure 1. Starting at the far left, it’s is back January of always so obviously, what was going on here was the Great Recession, right? That was the routing of the market, all kinds of defaults, bank bailouts, automobile manufacturing bailouts. But you got the H1N1 Swine Flu outbreak.
JASON: Right, that’s not to draw a comparison between the Coronavirus and the H1N1 Swine Flu outbreak. Those are two separate events and viruses. However, when that was going on back in the summer of 2009, everyone was just gripped by questions like, “How bad is the Swine Flu outbreak going to be?”
DEAN: Right! Especially after we just got finished with the Great Recession, so that did move the markets.
JASON: Right.
Ebola Virus
DEAN: Now, back in Figure 1, you showed us the US debt downgrade, the Ebola virus outbreak. The Ebola virus outbreak drop doesn’t look as significant as what we see today, but I think it’s just on a different scale. I believe the pullback there was somewhere in the 12-12.4% range on the Ebola virus. So it was a correction, and it moved the markets lower. Again, there was fear, right?
JASON: Right.
DEAN: People didn’t know! They had fears like, “What is the Ebola virus? How are we going to be able to cure it? Is it going to become a pandemic?” And of course, that’s the same thing we hear with the Coronavirus.
JASON: Right. And it’s not to make light of any of these viral outbreaks. The loss of life is tragic, but we’re looking at things today from an economic viewpoint. What was the impact that these viral outbreaks had on markets around the world? And historically, they have had, maybe a quick downturn in the market, but no long-lasting impact.
Yield Curve Inversion
DEAN: Moving further to the right in Figure 1, you show the US Treasury yield inverting. Now, that inverted not quite to the Two-Year to the 10-Year, right? So, the inversion simply means the 10-Year yield goes below what the Two-Year yield is? Well, now the 10-Year was below what the one year was. But it never did quite hit below the Two-Year’s even though it was pretty darn close. I think we must realize there’s always going to be something going on, that’s knocking the markets off-kilter. The markets are an emotional being because it’s people trading and saying, “Oh, I have to do this. I have to do that.” That’s not the right way we should look at this, is it?
JASON: No, that’s not how we should look at this.
Know Your Risk Tolerance Level
JASON: If you’re working with an advisor, the chances are good that you’ve gone through some sort of a risk tolerance exercise. When you went through that exercise with your advisor, you selected a portfolio that was in line with your goals and your financial plan and your risk tolerance. If you’re opening up your February statements and you’re surprised or shocked, it’s probably a good opportunity to revisit that risk tolerance discussion with your advisor and talk about any changes you should be making. We’re still within earshot of all-time highs, right? We’re only down 2%, maybe 8% from all-time highs?
DEAN: And of course, when we’re doing financial plans, one thing we’re looking at is, how much risk do you need to have in your portfolio to accomplish your goals? Or said another way, what’s the least amount of risk that we could take and be able to achieve all your goals? So if emotions are running high, and you’re just thinking, “Gosh, I’m nervous. I don’t want to see a big drop!” Get with the advisor and say, “What’s the least amount of risk we can take and still accomplish our long term objectives?” If you can look at your financial plan, and you can say, “You know what?
I was at a 95% probability of success two weeks ago, and I’m still at a 95% probability of success.” That means you don’t have to worry. It means you don’t have to think, “Oh my gosh, this has changed my life.” Yes, the portfolio is down, but as you can see from Figure 1, it’s normally a temporary thing. And it’s always been a temporary thing, but sometimes the temporary period is a little bit longer.
A yield curve inversion doesn’t mean it’s an immediate recession, but it does signal something that could be coming down the road and has in the past as well. Nobody is putting it on the calendar, saying, “This is when it’s going to start.”
– Dean Barber
Past Yield Curve Inversions and the S&P 500
FIGURE 2 – YCharts.com
DEAN: Let’s go to the yield curve. Go through Figure 2 with us real quick, Jason.
JASON: Sure. I went back to 1978, and what we’re looking at is the spread between the Two-Year Treasury and the 10-Year Treasury on top. The top chart is the 10-Year minus the Two-Year. There’s a line that goes through the middle of the top chart, and that’s zero. So, anytime that purple line goes below zero, it means we’ve had a yield curve inversion. What you see going back to the 70s is typically when you have that yield curve inversion, a recession follows.
DEAN: So, on the very right in late 2019, we almost touched zero.
JASON: Yeah, we did touch it, but just barely. I think it only lasted a day or two.
DEAN: Yeah, it may have even just been an intraday thing. Now, we did see the 10-Year Treasury hit an all-time low at 1.3%. I think that was on Wednesday, February 26, 2020. We’ve never seen yields that low. At the same time, the 30-Year Treasury hit an all-time low at about 1.7% or so. So extremely low rates.
JASON: Yep. Mortgage brokers are going to be busy with refinancing.
Speaking of Mortgages and Housing…
DEAN: Something that’s interesting on that though is with all the bad news that’s out there. There was an article that came out on CNBC that said that housing starts get a 12-year high. So that would typically be something that would tell us that the economy is on solid footing. People are buying, and they’re building. It’s a good sign, right? Yeah, but the Coronavirus is overshadowing a lot of what I consider to be some other good things that are happening in the economy.
The Stock Market and the Economy Aren’t the Same Things
JASON: Sure, of course. The economy and the stock market are two separate things tethered together, generally. There’s a good analogy I’ve heard on this. Imagine a man walking his dog through a park, connected by a leash. The dog might get distracted by a squirrel and run to the right and then get distracted by another dog and run back to the left. The man, though, continues walking in a straight line at a steady pace. They’ll end up at the same place by the end, but this dog is a representation of the stock market, right? It’s erratic, moving all over the place for no apparent reason, and the man is the economy.
DEAN: That’s a perfect analogy. I just hope the dogs not too big and pulling the economy all over the place. Sometimes you do see that happen, though, and I think that’s what we see here with that 10-Year and 30-Year Treasury hitting those all-time lows. Maybe some false signals or uncertainty about what’s going to happen with the economy because of the Coronavirus. That’s pulling down financial instruments on the 10-Year and 30-Year Treasury.
Historical Yield Curve Inversions and Market Performance in the Following Months
FIGURE 3
DEAN: So you also put together Figure 3 for us, Jason, and it’s looking at what happens to the markets after a yield curve inversion. Take me through this slowly.
JASON: Sure. So there’s a lot of different numbers in Figure 3. I think the big takeaway is, generally, when there is a yield curve inversion; it signals that there are rough times ahead. Whether it’s the stock market or the economy, you’re going to have some turbulence. It’s not a good timing mechanism, however. What we’re looking at here, again going back to the 70s, every time the yield curve between the 10-Year and the Two-Year inverted, where was the S&P 500 the day of the inversion? What about six months after, 12 months on, 24 months on, three years, and then five years on?
DEAN: So this inversion in 1978 on the bottom of Figure 3, didn’t do much?
JASON: Nope.
DEAN: I think that that was a deal where the economy had just come out of that slow period there with the energy crisis in the early 70s. But here’s what I think is most interesting. You see the yield curve inversion on May 26, 1998, that was just before the Dot Com Bubble. Six months later, you see 8.5% on the S&P 500, 12 months later, it’s at 19.3%, and then 24 months later, it’s at 26%. However, then if you look at 60 months later, now it’s at -14.7%!
A yield curve inversion doesn’t mean it’s an immediate recession, but it does signal something that could be coming down the road and has in the past as well. Nobody is putting it on the calendar, saying, “This is when it’s going to start.”
An Inverted Yield Curve is NOT a Good Timing Indicator
JASON: Right, this is not something that you’d want to look at and say, “Based on when the yield curve inverted, I need to move my stocks into bonds or make an overhaul to my portfolio.” The reason being it’s not a good timing indicator.
DEAN: It could mean that maybe over the next six to eight or 12 months, maybe you want to get a little less aggressive, or perhaps you reduce the equity exposure a little bit.
JASON: If nothing else, it’s just another good opportunity in a reminder to look at your portfolio, the level of risk that you’re taking and what your exposure is, should things get bad.
DEAN: And you really should be looking at that on a regular basis.
JASON: Absolutely.
Coronavirus by the Numbers
FIGURE 4 – GisAndData.maps.arcgis.com
DEAN: Alright, so let’s go to the Coronavirus here. And you can check out this particular website here because I want everybody to understand what’s going on here. There are two numbers we see on this that are plastered all over the news. You have to dig deep in written articles to find the third number that we’re going to discuss here. The first number is 82,550. That’s the total number of confirmed cases as of February 27, 2020. And of course, we know by the time everybody’s watching this, there’s going to be more. However, right now, there are 2810 deaths. So those are the things that you see in the media and news.
What About Coronavirus Recoveries?
What you don’t see is the 33,252 recoveries, right? So those people are no longer infected. A better way for us to look at this is from a logical standpoint, not from sensationalism, or a, “Let’s scare the heck out of everybody.” standpoint. What’s the number of active cases? How many people today are contagious? And what you see in Figure 3 down below on the right, and again, visit the website here so you can look at this yourself, but what we see is the total number of confirmed cases, that path of growth has slowed dramatically.
I mean, if we were continuing up on the orange line like it was in late January 2020, we’d see that line going much more dramatically upward. The rate of confirmed cases has slowed, and the number of cases where people have recovered has increased substantially. Really what we saw from about February 17, through to February 27, 2020, was almost a 20% decline in the active cases. I wish we would see some headlines saying, “There’s a decline in the active cases.” Because we’re having, a significant number of those people that are recovering. Have you read that anywhere?
JASON: No, it’s all about the total confirmed cases and how many people have died from the Coronavirus.
DEAN: Right! So, then you get this hysteria of, “Well, I’m not going to travel. I’m not going to the grocery store, going to the gym, or I’m canceling our vacations.” I get that we have to contain this thing because we don’t know what’s going to happen. However, when I look at these charts and look at reality, the containment has been good. You can go to that website, and you can click on any one of these, let’s do Mainland China.
Coronavirus by the Numbers – Mainland China
FIGURE 5 – GisAndData.maps.arcgis.com
And you can see the confirmed cases and deaths. And well, Mainland China is where most of the deaths have occurred, 2744 of them. But look, 32,879 people in mainland China have recovered. Now, what I think would be even more fascinating to understand is; of the people who have passed away, did they have some sort of other problem? Maybe a different respiratory problem or they older. Possibly they had some kind of a heart condition or something like that.
I don’t know that there’s that much data out there on that right now. But the other thing that I haven’t seen is, what’s the actual time from when you get Coronavirus to when you recover? I haven’t seen any data on that. I have to imagine with over 33,000 people who got Coronavirus and recovered; there must be something coming out on that on the averages. And so when I look at this, yes, I’m still nervous about it. Yes, it still is worrisome. But I think we’re seeing things trend in the right direction with the number of active cases dropping so dramatically here throughout the last just last 10 days. Any other thoughts you want to share?
JASON: Just be aware of what’s going on in the news, whether it’s the Coronavirus or an election coming up. Be mindful of what’s going on, but don’t let your emotions override the decisions that you need to make from a sound financial standpoint.
DEAN: All right, good stuff. Jason. Thanks for being with me.
JASON: Thanks Dean
Coronavirus Fears Have Impacted the Market, but Have they Impacted Your Overall Plan?
There you have it, the real story behind what’s going on in the markets and economy due to Coronavirus fears. We do our best to stay on top of world events such as this so we can help provide our clients with solutions for their individual plans. If you have questions about how your retirement might be impacted, reach out to us. Schedule a complimentary consultation below or give us a call at 913-393-1000 and one of our staff will connect with you to discuss your needs.
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