This month, we provide perspective on the recent outbreak of the coronavirus and how it impacts a diversified portfolio.
The global outbreak of the Coronavirus has dominated headlines so far in 2020 and has led to significant market volatility as investors digest the impact it has on China’s supply chain and economic growth. Since the first coronavirus death was registered on January 11th, foreign stocks dipped over 3% and US stocks declined 1.2% through month-end . The stock volatility we have experienced to start the year highlights the role high-quality bonds plays in a diversified portfolio. Over the same time period, the broad bond market is up 1.5% . Comparing the outbreak of the Coronavirus to another notable global epidemic originating in China, the SARS outbreak of 2002-2004, allows us to put things in perspective.
On February 10th, 2003, China notified the World Health Organization (WHO) of the SARS disease. Almost a month later on March 12, the WHO issued a global alert about the new virus followed shortly thereafter by an emergency travel advisory. There are striking similarities with this year’s Coronavirus outbreak. Foreign stocks declined 6.8% and US stocks fell 3.6% over that time period in early 2003 amid concerns of the virus’ scope and transmission, while the broad bond market gained 1.5% over that same time.
It is our firm belief that maintaining an allocation to bonds provides a source of stability and capital preservation by counter-balancing the more volatile stock side of the portfolio. As stocks and bonds have a low or negative correlation, they tend to move in the opposite direction of each other. As a result, when the stock market does poorly, bonds are likely to hold their value. Not only has this been the case in times of economic recession , it has also been the case over times of notable stock volatility like during the SARS outbreak.