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Keep Your Head During These Wild Markets: Northern Trust

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With the coronavirus crashing markets around the globe, Northern Trust Asset Management conducted a webinar to review historical events, in terms of other epidemics and effects on markets, in hope of injecting some sanity into investing.

“Be thoughtful about what you’re doing, especially with managing investment risk,” Chief Investment Officer Bob Browne said on the webinar, held Tuesday.

Fear is everywhere, as judged by the volatility index known as the VIX topping 82 on Wednesday, after a 43% jump on Monday. Browne believes that global growth already was going through restructuring, and will “even moreso” with the coronavirus.

To put the coronavirus in perspective, Browne showed a chart with data from the World Health Organization comparing relevant outbreak references. On one end of the scale was Ebola. The 2014 outbreak had a 25-90% mortality rate, infecting roughly 29,000 with about 11,000 deaths. Two of those were in the United States.

The swine flu pandemic in 2009 had a .02% mortality rate, infecting 11%-21% of the global population, with up to 575,000 deaths worldwide, 12,500 of them in the United States.

In comparison, the chart showed that Covid-19 had a 3%-4% mortality rate with (and this changes daily) about 165,000 people infected globally, with 6,500 deaths, and 41 of those in the United States. However, as of Wednesday, there are more than 214,000 cases globally, with more than 7,700 cases and 118 deaths in the United States, according to Johns Hopkins.

What is especially different about Covid-19 is its effect on the stock market. After the global health crisis was declared, the S&P 500 fell 17.4%. Other epidemics didn’t have that dramatic of a reaction. In fact, six months after the declaration of swine flu amid the Great Recession, the market was up 26.2%, while after SARS, the market was up 22% (The market rose 5.7% after the Ebola outbreak).

“Through March 17, it has been painful,” Browne agreed, but he highlighted that in a bear market the average drop was 33% with an average recuperation time of 254 days. However, bull markets last three times longer than a bear market on average, with a 96% average gain.

Although the stock market gets most coverage, Browne saw some key areas to watch:

  • Oil markets: With crude oil dropping 30% from its previous close on March 9 (and falling $45 since Jan. 8 through March 17), Northern Trust looked back to see this kind of oil drop’s effect on various financial indexes. They found that the best index performance after an oil price drop was the U.S. Aggregate Bond index, followed by the Global Aggregate Bond Index. Six month after a major drop, the U.S. AB was up 5%, up 10% after 12 months and up 20% after 24 months. Similarly, the index was up 2% after six months, 6% after 12 months and 16% after 24 months. In comparison, the MSCI ACWI ex. U.S. was down 9% after six months, down 12% after 12 months and down 10% after 24 months.

On Wednesday, oil dropped 24% to an 18-year low.

“Oil prices do have an impact on the bond market for 12-24 months. Bond yields remain low for an uncertain length of time, and international equities take longer to rebound,” Browne said.

  • Central banks: The Federal Reserve and its global counterparts have been aggressive in easing during this crisis, especially with the Fed’s emergency slashing of interest rates to 0.25%. EU rates are already at 0%, while Japan is at negative rates. Browne says they don’t see the Fed reversing this decision anytime soon. “We are in a low rate and accommodative policy for an extended period of time, which has implications for long-term cash flows.”

Historically, though, when the Fed eases, the best performers again are U.S. and Global Aggregate Bond indexes, he said.

Two key risks to keep an eye on, Browne said, are failed governmental efforts to contain the virus and geopolitical skirmishes, such as Russia ‘s oil price war, that may offset some “virus-driven policy efforts.”

Northern Trust has adjusted its portfolio to be overweight high-yield bonds, U.S. equities (income oriented) and global listed infrastructure and real estate.

Browne says the firm sees the coronavirus being “front and center for a period of time. Cases peaked out [in China] at four to six weeks, but it remains to be seen [what happens in the United States]. It depends on how people respond,” he said. “A re-emergence of the virus in China and India is possible.”

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