Cutting to the Bone

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February saw the COVID-19 epidemic progress into a global pandemic that now touches every continent except Antarctica. The virus is expected to take a toll on growth not only in Asia, but also in developed markets in Europe and North America. Equities dropped steeply in response to this grim outlook, with the S&P 500 down nearly 16% at the extremes. In response, the Federal Reserve stepped in on March 3 with an unscheduled cut of 50 bps to the overnight federal funds rate (known as an “intermeeting cut” because it occurred between scheduled Fed meetings). Markets rallied briefly on this news before moving on quickly to continue their journey downwards. Lower interest rates may help corporate investment, but they will not get consumers back out to the movies or onto cruise ships.

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A Market Diagnosis for the Wuhan Coronavirus

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January saw the markets bedeviled by macro risks, with inflamed U.S.-Iran tensions followed by revelations regarding the spread and nature of the Wuhan coronavirus (also known as 2019-nCoV). The Federal Reserve committed to supporting “inflation returning to the Committee’s 2% target” (emphasis added), a pivot from previous statements that merely committed to supporting inflation “near” the 2% target. This was interpreted by the markets as a dovish tilt in the Fed’s policy stance.

A challenge that’s been seen before?

With the Wuhan coronavirus showing little sign of abating, we chose this month to analyze the impact of emerging market epidemics. We assume trends in Google searches for specific terms (e.g., “avian flu”, “ebola”, “zika”, and “coronavirus”) are indicative of media coverage and market anxiety. To that end, we use Google Trends, which indexes the number of Google searches for a particular term over time.

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What the Current U.S.-Iran Tensions Could Mean for Asset Allocation: Lessons from Past Conflicts

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The opening days of 2020 saw the news dominated by coverage of the U.S. attack on Iranian Major General Qasem Suleimani, with markets focused on the attack’s implications and Iran’s response. As of writing, U.S.-Iran hostilities appear to have stabilized for the time being, with Iran facing domestic protests following its admission that it mistakenly shot down a Ukrainian airliner.

In light of these circumstances, we look to prior instances of U.S. military involvement in the Middle East and subsequent performance across U.S. equities, crude oil, gold, 10-year yields, and the U.S. dollar. Specifically, we analyze the days following the 1986 U.S. bombing of Libya, the 1990 inception of the First Iraq War (Gulf War), and the 2003 American invasion of Iraq. Our findings are summarized in the table below.

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