When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
Coronavirus Update: Fear of the Unknown Slams Market Sentiment
Rapidly evolving conditions bring great uncertainty
Risk markets are likely to follow the news cycle; the markets could bounce back under good news
Policymakers, including the US Federal Reserve (Fed), appear ready to act to support economic growth
We are watching the consumer for clues, particularly for changes related to employment
We have become slightly more defensive where warranted but believe the market pullback will create select buying opportunities
Fear of a pandemic buffeted global equities hard this week, negatively hitting the MSCI World Index and plunging several market indices, including the S&P 500, into correction territory. Long-term Treasury bonds hit record low yield levels and gold rallied sharply as investors turned to safe-haven assets. While it is difficult to know whether these trends will continue, we do expect the markets to be choppy over the next several weeks.
Rising Downside Risks Spook Markets
Few things can negatively impact market sentiment more intensely than rapidly rising uncertainty. While China seems to be getting a handle on disease containment, with the rate of increase of new infections slowing, the transmission of Coronavirus disease (COVID-19) is adding uncertainty across the globe. More authorities have implemented or are considering containment measures that restrict economic activity. Consumer sentiment and behavior are likely to be damaged as a result. This means investors need to consider scenarios where business activity slows in more locations and companies experience more lost revenue than initially projected.
More worrisome, however, are people who have not traveled to China or been in contact with someone who has and have contracted the virus. Since health professionals do not fully understand how the virus is transmitted, surprise outbreaks may occur anywhere across the globe. Also unclear is how viable the virus will be in warmer weather. More uncertainty has come to the market and the range of potential downside outcomes has widened.
Market Participants Work With Probabilities
Opinions are difficult to develop when so little is understood about the virus. Our view coming into 2020 was that global growth would pick up modestly versus 2019. The outbreak of the virus means that, at best, economic data will remain distorted through the first quarter and at worst, risks to the downside will have risen sharply. Of greatest concern is that we really cannot predict the timeframe or full impact.
Analyses of past viral outbreaks provide some clues on potential outcomes, but we caution relying on this approach. China’s economy has changed significantly since 2003, both in its size, mix of services/manufacturing and role in the global economy. China accounts for 17% of global GDP today versus 4% at the time of the SARS outbreak. Within China, according to World Bank data, services’ share of GDP is now ten percentage points higher than in 2003. From an economic standpoint, the past may not be a helpful prologue.
Consequently, we expect the market to react to the news cycle, focusing on expert opinions and facts as the situation unfolds. This applies to good news as well as bad news. For example, if the outbreak in Europe is smaller than currently feared because of its advanced health care system, the probabilities of severe scenarios decline. In this scenario, investors would likely have a good appetite for risk assets. Recall that the S&P 500 was at a record high barely two weeks ago until sour sentiment knocked it down. Sentiment could snap back just as quickly as it fell.
Watch the Consumer and the Fed
The US consumer had very positive momentum prior to the outbreaks in China and Europe. The January employment report coupled with respectably solid consumer confidence should provide enough momentum to support spending and economic growth if the outbreak in the United States is muted. However, a pullback in consumer spending, driven by fears of travel or gathering in public places, could create a transitory reduction in GDP. Of greater concern would be anything that damages the overall employment picture. Over the coming months we will be watching several early warning indicators very closely, including:
The number of people reporting they are working part time for economic reasons
The average workweek and aggregate hours index
Layoffs, unemployment claims and duration of unemployment
The odds of the Fed easing this year have sharply escalated – Fed funds futures are fully pricing-in a cut by April. However, incoming data through the first quarter have, by and large, been better than expected. Based on reported data, there would be no reason for the Fed to act. The trouble is that none of these releases captured the rapidly growing risks caused by the COVID-19 outbreak.
Recent Fed speak has offered some hints of a change in position. Richard Clarida, vice chair of the Fed, has spoken of a “meeting by meeting” approach. While the Fed may typically like to wait to see the risks translated into data, there seems to be little benefit in waiting. Given the acute downside risk to the outlook, the Fed will likely err on the side of caution, with a March meeting rate cut now in the offing.
For Prudent Investors – Tactical Hedges and Liquidity
The high degree of uncertainty leads us to take a measured approach. Within our long-term portfolios, we have selectively reduced position sizes in consumer discretionary, cyclical and energy-oriented holdings, and at the margin increased position sizes in consumer staples and utilities. Sentiment driven sell-offs tend to lead to indiscriminate selling, which generally creates buying opportunities. For this reason, we have slightly increased our holdings in cash.
Within fixed income, we are also adopting a conservative approach. Both credit and high yield spreads have backed up from recent levels. While this has created modestly more attractive valuations, we are not changing our positioning at this time. Within currency markets, we have not observed any meaningful moves, in contrast to other areas. We suspect that given the global nature of the epidemic, the shocks have not amplified cross-country divergences. To date, we have not adjusted our currency positioning.
Within our multi-asset and regime-aware portfolios, we have reduced positions in riskier assets such as equities and shifted into traditional havens such as gold and long-dated Treasuries.
We continue to monitor this very fluid situation. In the short term, risk is likely to remain elevated across asset classes. But the longer the outbreak persists, the higher the economic costs. The silver lining is that once the virus abates, economic activity could resume quickly. In the meantime, supportive policy response could cushion the impact.
Investing involves risk including the risk of loss of principal. The views expressed in this material are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements.
Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This information should not be considered a recommendation to invest in a particular sector or to buy or sell any assets shown. It is not known whether the sectors or assets shown will be profitable in the future. The holdings are taken from the accounting records of SSGA which may differ from the official books and records of the custodian.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The targets and estimates are based on certain assumptions and there is no guarantee that the estimates will be achieved. Investing involves risk including the risk of loss of principal.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
SHARES IN THE FUNDS OF THE SPDR® ETF SICAV, SSGA SPDR ETFS EUROPE I AND SSGA SPDR ETFS EUROPE II PLC MAY NOT BE AVAILABLE FOR OR SUITABLE FOR YOU. THE VIEWS EXPRESSED IN THIS SITE DO NOT CONSTITUTE INVESTMENT ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. Further information and the prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website and from your local SSGA office.