As February drew to a close global capital markets dropped sharply as the specter of global pandemic spread. The highly contagious Coronavirus is a potential threat to life as well as to economic growth. While anti-viral drugs and vaccines that might thwart the outbreak are still in development, investors who follow our approach can take comfort that their portfolios include a form of immunization against financial crises.
A global economy, for all its merits, is vulnerable to crises that can originate virtually anywhere. The disease emerged in China at the end of 2019. As we have pointed out China’s economy is the world’s second largest and accounts for 16 percent of global GDP. So, even while the Chinese stock market accounts for only 3 percent of the global equity market, the Coronavirus-induced economic slowdown in China is already spilling over to other economies. China is a major trading partner with the U.S. and U.S. firms have major investments in China. Further supply chain disruptions, restrictions on travel and barriers to investment may slow global GDP growth, including in the U.S.
Global capital markets as usual wasted no time in reacting to this news. The U.S. stock market fell by over 3 percent on Febru- ary 24 when it became clear that the virus had spread to Italy and Iran. Ex-U.S. developed markets and emerging markets dropped sharply as well.
We include gold, high-quality short term bonds and cash to protect specifically against such dramatic and unforeseen finan- cial crises. Since news of the virus first broke on December 31, the U.S. stock market has fallen 1.1 percent (as of this writing). Meanwhile the gold price has increased by 9 percent while U.S. short-term investment-grade bonds have returned 1.3 percent.
The extent and rate of transmission of the Coronavirus and its ultimate impact on global growth and stock markets are unknown. But investors can take comfort that the health of their portfolios includes assets that have consistently served well during times of global distress.
Also in This Issue:
94 Years of U.S. Stock Market Returns
A Rational Approach to Retirement: Begin with Your Dreams
A Reader Inquires
How to Start a High-Yield Dow Portfolio
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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