Strategizing Investments as The Global Economy Enters a Pandemic

As of this article there have been 121,061 confirmed cases of the coronavirus worldwide resulting in 4,368 deaths. Recently, the World Health Organization declared the coronavirus a pandemic. As a result, businesses have begun to feel the effects. Supply chains have been disrupted, consumers are distracted, and equity markets are in steep decline. Since the start of the year the S&P 500 has plummeted more than 15%.

In the opening remarks of the March 11th World Health Organization (WHO) briefing we learned that “In the past two weeks, the number of cases of COVID-19 outside China has increased 13-fold, and the number of affected countries has tripled.” This message, and the numbers behind it, have incited fear in equity markets. Goldman’s chief equity strategist, David Kostin has taken this recent upheaval as a clear indication that “the S&P 500 bull market will soon end.” Their research has led them to conclude that the S&P 500 will decline by 3%, 15%, and 12% in the first, second, and third quarter of this year respectively.

The essential problem facing both medical professionals and investors is the same: uncertainty. There is still much that is unknown about the coronavirus. As a result, the future is difficult to predict. This obscurity has left investors fleeing to assets that are more durable stores of value during turmoil. For many, gold is such a place.

In response to this strategy, experts at the World Gold Council have referenced gold pricing data from the 2003 SARS epidemic as a corollary. While there are many differences between the coronavirus and SARS, both share the characteristics of being a health crisis that looms large in the global psyche. During the SARS epidemic gold, at one point, reached an “intra-quarter maximum of 16%.” Moreover, as recently as late February the Wall Street Journal reported that gold reached a “fresh seven-year high as investors flee riskier markets.” Like any crisis, the coronavirus has presented investors with reasons to be fearful, while also offering opportunities.

Gold may provide short-term appreciation amid turmoil. However, for many, the benefits are downstream. An investment in gold today represents a way to potentially limit volatility that is likely to persist for some time. Two days ago, the CBOE Volatility Index (VIX), a popular measure of investor sentiment, reached its highest point since the global financial crisis. The VIX rises when investors are fearful and falls when investors are confident.

The Bottom Line:

Medical professionals are unclear on what lies ahead, but they have seen enough to know it is not good and that the situation will likely worsen before improvements begin. As the WHO Director-General remarked, “This is not just a public health crisis, it is a crisis that will touch every sector – so every sector and every individual must be involved in the fight.”

Taking a cue from this uncertainty, equity and bond markets have reacted with plummeting values and soaring volatility. While frightening, investors have an opportunity to reconsider their strategy and reevaluate their asset allocation in the context of what will prove to be “the new normal” in the coming months. Gold should be part of that allocation model.  

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