There is an uneasy sense that the virus could trigger a bigger rupture in financial markets
WHEN AMERICA, the hub of global capital, is this far into an economic expansion and a bull market, investors feel two conflicting impulses. They hope that the good times will last, so they are reluctant to pull their money out. They also worry that the party might suddenly end. This is the late-cycle mindset. It reacts to occasional growth scares—about trade wars or corporate debt or some other upset. But it tends not to take them seriously for long.
Investors have, sensibly, tried to calculate which assets are most exposed to the shock. The worst-hit stocks were of firms that rely on far-flung supply chains, such as carmakers or electronics firms; or are directly affected by restrictions on travel, such as airlines; or are most exposed to a China-led global slowdown, such as oil firms. Investors scrambled for safe assets. The yield on ten-year Treasury bonds fell to an all-time low of 1.31% on February 25th.
Start with the first, volatility. Equity-market instability might feed on itself. The VIX, which measures the expected volatility implied by the price of options on the S&P 500 index, vaulted from around 15 to above 27 in a matter of days . Some investment strategies are particularly sensitive to it. For example when volatility is low, they allow for a bigger weighting of equities in portfolios.
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