U.S. equities experienced their worst week of losses since the financial crisis as coronavirus fears took hold. The news on the coronavirus seemed to be negative from the beginning of the week to the end, with the chances of a self-fulfilling vicious cycle of fear being reinforced almost constantly. The restrictions on travel and uptick in worldwide cases added to fears about the impact of the virus on global economic output and the effectiveness of government and monetary policy efforts to combat it.
U.S. interest rates fell to all-time lows as fears about the weakening economy and the potential for central bank action pushed the 10-year Treasury yield to as low as 1.03%. To put that level in perspective, the 10-year yield started the year at 1.92%. The fall in Treasury yield has caught the market offsides and the buying of Treasuries as a result of risk-parity trading and other forced buyers of interest rates has been insatiable. The expectation is building for a 50 basis-point interest rate cut by the Federal Reserve, either preemptively or at the March meeting. In advance, LIBOR saw its biggest decline in yield since 2008.
I do think the equity market was overbought and complacent to the impact the virus was having in China entering last week. Whether or not this is a good buying opportunity will have a lot to do with the measures the U.S. and foreign governments impose to help control the spread of the virus. Given the uncertainty of the next several weeks, I think picking a specific bottom will be difficult. My advice is to look for value in sectors or names that are seeing price declines in sympathy with the overall market, but have strong balance sheets and business fundamentals.
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