Everything Rally Gets Ripped Apart by Virus Fear Lashing Markets
(Bloomberg) -- Investors who feel like they’ve gone from the best of times to the worst of times in a matter of weeks aren’t far off: Traders started the year toasting the highest returns in a decade; they may end its second month drowning their sorrows.
The coronavirus-fueled sell-off in stocks, commodities and more has ripped to shreds any notion of a global “everything rally.” The cumulative loss for the year across more than 20 major asset classes tracked by Bloomberg stood at 37% on Tuesday night. Their cumulative return in 2019 was 273%.
It’s early in the year to be tallying gains and losses, but it’s the abrupt reversal of sentiment that’s startling. Investors won’t know the exact cost of the coronavirus, both in human and economic terms, for months. But they know the illness is now spreading fast outside China, and that the headwinds will hit an aging global business cycle and a U.S. equity bull market that has outlasted all others.
“Given where we are in markets, given where we are in the cycle in 10 years, anything that’s negative in markets they’re going to jump,” said Philip Webster, director of European equities at BMO Global Asset Management in London. “Investors shoot first and ask questions later at the moment.”
The scorecard reflects those kinds of concerns. Industrial raw materials -- the ones most exposed to the business cycle -- have been hammered. Shares of companies, particularly in the riskier developing world, have tanked.
At the other end of the spectrum, the ultimate safe havens for an economic downturn -- gold and Treasuries -- are winning in 2020, alongside high-quality American corporate debt. The preference for these dollar-denominated assets has also given wings to the greenback.
These are the big survivors of the everything rally. For much of 2019, U.S. bonds and gold rallied on the back of a central bank pivot toward easier policy at the start of the year. Now, expectations that more rate cuts or stimulus will be needed to combat the impact of the coronavirus are further stoking those kinds of bets.
“Bond yields have stayed low, stimulus is there, rates are still being held down,” said Webster. “Yes, there’s been a shift out of equities into non-risk assets, but I’m fairly relaxed” about where the portfolio is, he said.
Overlaying the Gregorian calendar on asset moves can be deceptive, of course. Any investor or trader whose performance isn’t measured annually may look at the picture very differently. For example, even with the turmoil of the past four trading sessions in U.S. stocks, an investor who bought the S&P 500 Index 12 months ago would still be up 12% through Monday.
On Wednesday morning stocks in particular appeared to be making fresh efforts to stabilize. Futures for the benchmark U.S. gauges fluctuated, while the Stoxx Europe 600 Index clawed back well over half of its earlier losses. Market players are scrambling to figure out whether the virus will be contained and a V-shaped recovery will ensue, or if the impact will be lengthy leading to more L-shaped economic performance.
“It’s a bit early to know which will be the scenario,” said Denis Panel, head of the multi-asset, quantitative and solutions group at BNP Paribas Asset Management. “We’re in a situation where we could increase the risk -- the V -- or we could reduce the risk and short the market potentially if it’s an L scenario. It’s quite an interesting time.”
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