Virus outbreak spurs a market breakdown

March 11, 2020

Central banks can’t eliminate risks, but easier financial conditions should help counteract slowing economic activity.

The Coronavirus outbreak has become the dominant theme in markets, mostly pushing aside other macro risks like U.S. elections and trade tensions. While it is too soon to gauge the total impact of the outbreak, the reduced flow of people and goods due to travel restrictions and quarantine measures have the potential to slow economic activity materially in the near term. On top of it all, the unraveling of an OPEC pact to stabilize oil prices sent stocks to their worst day since 2008.

The outbreak and containment measures will cause a large and persistent economic shock, but a global recession is still unlikely. One counteracting force to the virus’s impact is the easing of financial conditions. Global short-term rates have dropped significantly, and central banks seem increasingly likely to respond to the outbreak. The Fed cut interest rates prior to its March meeting and additional action is expected. China has also taken measures to ease monetary conditions and the situation appears to be slowly stabilizing there.

Furthermore, there are encouraging signs of a global fiscal response coming together, which could have a more immediate impact on economic activity. Ultimately, broader stimulus measures cannot eliminate risks, but easier financial conditions should help counteract slowing activity and are likely to remain even after the virus’s impact passes through the system.

Despite negative performance for the month of February, the BlackRock Multi-Asset Income Fund has delivered strong relative returns during this bout of volatility. The fund was already conservatively positioned heading into the selloff given our less favorable view on stock and bond prices and the potential for less upside. The market reaction has been extreme, and buying opportunities are developing. But uncertainty remains, and our preference is to be even more cautious in the near term by reducing equities and hedging some of our credit exposure.

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Michael Fredericks
Head of Income Investing for BlackRock Multi-Asset Strategies Team
Michael Fredericks, Managing Director, is head of Income Investing for the Blackrock Multi-Asset Strategies group and lead portfolio manager for the Multi-Asset Income, ...
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