The markets continued their volatile way today with another sharp selloff, as new worries in the energy sector added to an already fearful situation with the coronavirus. Before we go into some of the reasons for the sell-off, I want to emphasize that the medium-term prognosis remains for a decent economy supported by much lower energy prices, accommodative monetary policy, and the beneficial impacts of any additional fiscal policy that our leaders unleash.
As we all know, markets were already on edge given the growing economic impact of the coronavirus. Over the weekend, Italy quarantined almost a quarter of its population, severely depressing economic activity in the northern power-house region that includes Milan. Such measures appear likely to be repeated elsewhere with social distancing seemingly the best course of action for containment. While no-one knows how the virus outbreak will conclude and what the human cost will be, to a rational investor it seems to be a more short-term issue; with China showing some signs of getting back to normalcy, one could view the virus as a severe one- or two-quarter shock to global economic growth. Nevertheless, increasing headline risk and short-term investor fears were already setting the stage for a pronounced market move.
If the coronavirus was not enough for investors, over the weekend Saudi Arabia announced that it would be flooding the global oil market with cheap oil, aiming to increase its market share. The events had been presaged last week by a break-down in talks between OPEC (Organization of Petroleum Exporting Countries) and Russia that had sought to manage supply and keep prices higher. Saudi Arabia has the lowest cost oil in the world and thus has the power to inflict substantial long-term damage on other oil-producing nations, from Russia to Nigeria to the United States. Overnight, the price of oil fell over 30% and is currently hovering around $30 per barrel. At this level, much of the U.S. shale production becomes uneconomic. The shale boom has generated significant employment and localized economic growth; there is a significant risk that this impact is reversed. Notwithstanding these impacts, over the medium to long-term, lower energy costs should be a boost to both personal consumption and industrial activity. But, for now, dislocation in the energy markets has added a huge amount of uncertainty to already nervous markets.
The combined impact of the virus and the oil market shock increase the chances of a global recession. The coronavirus may push many European countries into recession while the oil market shock is likely to have a seriously detrimental impact on emerging market growth. The risks of a U.S. recession have materially increased, although there are too many moving pieces and uncertainties to make any bold predictions.
A market rout is never pleasant to live through, and the current environment has the added element of both human fear and human cost. This remains a very complex environment and it is possible that economic and social conditions will deteriorate further. At Market Street, we will continue to manage your money with a long-term philosophy and a mindset that prevents us from panic selling – an action that can result in a permanent loss of capital. While diversified portfolios have lagged equities during the 11-year bull market, at times like this they provide at least some comfort and protection. With markets in disarray, we will seek to identify and take advantage of dislocations that present attractive opportunities for a long-term, patient investor, comfortable in our view that markets will eventually continue in an upward direction.
In the meantime, please feel free to contact your Relationship Manager or any member of the Investment Team if you would like to discuss further.
This material has been prepared by Market Street Trust Company. The views expressed herein represent opinions of Market Street and are presented for informational purposes only. They are not intended to be a recommendation or investment advice and do not take into account the individual financial circumstances or objectives of the investor who receives it. Certain statements included in this presentation constitute forward looking statements. Forward looking statements are not facts but reflect current thinking regarding future events or results. These forward statements are subject to risks that may result in actual results being materially different from current expectations.