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Jason Turner
Chief Operating Officer
Great Lakes Advisors

Just one week ago, we were noting an all-time high on the S&P 500. After Monday's close, that index of large cap U.S. stocks had given up all of its gains for the year and Tuesday saw a further decline of more than three percent. Since hitting its high last Thursday, the index has fallen 7.65%. The CBOE Volatility Index ("VIX") experienced its biggest one day jump since early 2018 closing above 25 for the first time since February 2018 on Monday, and climbed over 27 in Tuesday's trading. In percentage terms, Monday's move was the seventh largest one day move for the VIX ever. Coupled with the fall in equity markets, we have seen a determined rush to "risk-off" assets such as U.S. Treasury Bonds and gold. The 10-year Treasury hit its lowest level since 2016 touching an intra-day low of 1.31% on Tuesday. The 30-year Bond, having slipped below 2% for the first time ever in late January, marked a new all-time low at 1.79% intra-day on Tuesday. Gold surged above $1690 an ounce early on Monday and stocks of many gold miners sit at 52-week highs.

This week's extreme negative reaction comes on the heels of sobering statistics concerning the spread of COVID-19 (the "Wuhan Coronavirus") and its impact on global economic growth. Friday's flash data for the U.S. Purchasing Managers Index (a gauge of U.S. manufacturing and service composite output) fell to 49.6, its lowest level since 2013. More concerning, the level dropped below 50, indicating the economy is contracting for the first time in seven years. More worrisome still, the service sector led the index lower with that component falling to 49.4. Manufacturing is holding above 50 at 50.8, but the service sector makes up 70 percent of the U.S. economy and its significant drop weighs heavily on short-term market reactions. Additionally, the U.S. Treasury yield curve, often an indicator of economic stress and recessions, showed serious concerns that COVID-19 will impact global growth. The 10-year/3-month curve has already inverted with 3-month yields higher than 10-year yields and the 10-year/2-year curve sits within 0.11% of doing the same.

While these economic indicators are starting to turn from green to yellow (clear to caution), it is important to note that the market and short-term economic data are often gauges of fear and sometimes poor indicators of long-term economic or market conditions. That is not to say that the concerns expressed through these market movements are unfounded. The recent spread of COVID-19 to new countries, including Iran, Italy, and South Korea, is troubling. The World Health Organization is contemplating labeling the outbreak a pandemic, while many in the academic community have already done so based on their independent models. Public health experts have expressed grave concerns over the ability of the world to slow the spread of the virus, which is currently spreading at a rate of 2-3 people per each infected person with containment indicated when and if that number drops below one. On Tuesday, the U.S. Centers for Disease Control announced that they expect to see community spread in the U.S. and that now is the time for Americans to prepare. Also this week, a noted public health academic expert went as far as comparing COVID-19 to the Spanish Flu pandemic from 1918 as a warning if the virus is not better contained in the near term.

At Great Lakes Advisors, we keep our eyes firmly fixed on the best interests of our clients over the long-term. While it is easy for investors to panic in this environment amid a real and tragic human impact from the virus, we feel it is important to hold true to a long-term focus, rely on clear data, and avoid succumbing to news cycle induced panic. Investors should remind themselves that the markets do not hold a medical or public health degree. The real economic impacts—which drive long-term market performance—are reliant on the lifespan, spread, and impact of COVID-19 not on a fear-based reaction to unknowns or partial data. There will certainly be impacts to first quarter economic data when it is released; however, outside of speculation and some earnings reductions or warnings from companies heavily exposed to China-based supply chains or global travel, we have yet to see true economic evidence of a prolonged slowing of global growth. Policymakers, around the globe and specifically in the U.S. and China, stand ready and able to swiftly step in with supportive monetary and fiscal policy. This action could overcome decelerating growth or at least provide a softer landing and increased capacity for a robust rebound. Finally, there are signs of the situation in China improving, even as the disease continues its global spread. The infection rate seems to be slowing in China while the work resumption rate is rising. These are early signs that China may be on the right path and hope that the rest of the world can follow suit.

Exogenous shocks to the markets, such as this outbreak, typically impact markets in the following order: price/yield impacts, then analyst estimate revisions, and finally operating/ economic results. We include each of these impacts as inputs to our analytical processes, and if the impact mounts and endures, our investment decisions will adapt. We believe that there will be continued market volatility until the data is more definitive and the virus is better contained, and we will adapt accordingly as information becomes more impactful.


This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.

VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge. The current VIX index value quotes the expected annualized change in the S&P 500 index over the following 30 days, as computed from options-based theory and current options-market data.

Securities, insurance products, financial planning, and investment management services are offered through Wintrust Investments, LLC (Member FINRA/SIPC), founded in 1931. Trust and asset management services offered by The Chicago Trust Company, N.A. and Great Lakes Advisors, LLC, respectively. © 2020 Wintrust Wealth Management