The Coronavirus Market Selloff: 3 Watchpoints for Markets - Advisor Perspectives

The Coronavirus Market Selloff: 3 Watchpoints for
                          Markets
                                                February 26, 2020
                                                by Paul Eitelman
                                             of Russell Investments
Want to read more by Russell Investments? Visit their Featured Firm page here

Is the current rout in markets the beginning of an extended pullback?

Shaken by fears of an expanding coronavirus outbreak, financial markets—which already came under pressurelate last
week—sold off aggressively in Monday’s trading session, with the Dow Jones Industrial Average plunging over 1,000
points. The S&P 500® Index tumbled 3.4% by Monday’s close, while the yield on the benchmark 10-year U.S. Treasury
note neared an all-time of low of 1.356%. As of Tuesday morning Pacific time, the selloff was continuing, with most major
benchmarks down another 1%.

What’s sparking the selloff? Reports in recent days of new outbreaks in Beijing, Italy, South Korea and Iran have investors
worried about a deeper and more durable threat to the global economy. And these fears are not unfounded.

It goes without saying that pandemics pose a downside risk to the global business cycle. Quite simply, they disrupt
economic activity and corporate profits through a number of channels. For example:

     Containment efforts – Closed factories means no output is produced.
     Supply chains – The reliance on an impacted area, such as the Wuhan region of China, for intermediate inputs can
     delay deliveries.
     Tourism – Travel controls and fear can slow dependent service industries.
     Spending – Consumers may defer discretionary purchases by avoiding busy retail centers.
It’s clear from the high frequency data coming out of China that we are on track for a rather large hit to economic growth in
the first quarter of 2020. These economic impacts should be felt the strongest in China (the epicenter), emerging Asia,
Japan, Europe, and—to a lesser degree—the United States.

                                     Page 1, © 2020 Advisor Perspectives, Inc. All rights reserved.

If there’s anything of a silver lining to the dent in global GDP (gross domestic product) the virus is expected to cause, it’s
that history suggests that, if/when this virus is ultimately contained, we should expect to see a rapid normalization in
economic growth rates and corporate fundamentals.

The virus: Know what you don’t know

We do not claim to have any unique insights or edge on forecasting the severity or duration of the current coronavirus
outbreak. What we do know, however, is that based on previous episodes (e.g., SARS in 2003), equities should likely find
a bottom once it can be credibly determined that the virus has been contained. Put differently, markets will likely recover
when investors think the impulse of new coronavirus cases has peaked.

                                      Page 2, © 2020 Advisor Perspectives, Inc. All rights reserved.

Source: World Health Organization data, as of Feb. 24, 2020.

Markets through the middle of last week had largely looked through the coronavirus as a transitory risk factor—indeed, the
impulse of new cases was moderating very nicely (see chart above). However, with several new centers of disease in
populated, economically important areas, this view has been challenged.

Key watchpoints for markets

In the days and weeks ahead, markets will be focused on three key things:

     1. The duration and breadth of the epidemic – If it accelerates into April and drags down Q2 data or spreads more
     prominently to other countries.
     2. Non-linearities – If companies fail, creating negative ripple effects (e.g., the closure of Chinese movie theaters).
     Given the interrelated nature of global supply chains, this is a risk we are closely watching.
     3. Policy response – If fiscal and monetary authorities step in with ample liquidity to prevent the above.
Global market outlook: Mini-cycle delayed, not derailed

The phase 1 China-U.S. trade deal and three U.S. Federal Reserve (the Fed) rate cuts in 2019 had seemingly set the
stage for a reacceleration in global economic and earnings fundamentals this year—a positive mini-cycle in the eleventh
year of the global expansion. The coronavirus is clearly a setback to this outlook. Based on what we know now, it appears
to have delayed the mini-cycle thesis until at least the second quarter of 2020.

However, there is some good news. With inflationary pressures currently muted around the world, there’s a very low bar for
central banks to inject liquidity and smooth the experience around the coronavirus. We’ve already seen easing measures
announced this year from China, Hong Kong, Singapore, Taiwan, Thailand, Malaysia and the Philippines.

The Fed—while on hold for the time being—may cut interest rates, too, if the virus impacts turn out to be larger and more
durable than initially anticipated. On the fiscal policy side, we have already seen measures being announced in a number
of Asian economies, including China, Hong Kong, Singapore and Taiwan.

In fact, similar to what we ultimately found with the trade war, the virus could turn out to be a cycle-extending deflationary
shock if it delays the date at which the Fed is willing to take the punch bowl away.

Investment strategy: Looking for evidence of a panic

We ultimately view COVID-19 as an unforecastable downside risk to the global business cycle. Yet we aren’t changing our
investment strategy on the whims of the daily news cycle. We believe much of this repricing in markets is appropriate.

Most of the time, financial markets are reasonably efficient pricing vehicles. But at certain moments, the collective market
psychology can swing to an unsustainable extreme of panic or euphoria. Our proprietary blend of technical, survey and
positioning data does not suggest that global market sentiment has reached an extreme of panic yet. But directionally, we
would look for an opportunity to buy a more significant dip in global equities here.

                                     Page 3, © 2020 Advisor Perspectives, Inc. All rights reserved.

Source: Russell Investments. Data as of Feb. 24, 2020.

Recent days have emphasized all-too well the important role that a well-constructed and well-diversified multi asset
portfolio can play to help investors still meet their objectives while weathering unforecastable events like this virus.
Remember that a multi-asset portfolio was built specifically to withstand market turbulence, and that fairer skies are likely
ahead.

Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the
top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not
representative of a projection of the stock market, or of any specific investment.

This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is
intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and
investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general
information only and are not intended to provide specific advice or recommendations for any individual entity.

Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be
completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with
any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce
returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset
classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should
consider how the combined risks impact their total investment portfolio and understand that different risks can lead to
                                      Page 4, © 2020 Advisor Perspectives, Inc. All rights reserved.

varying financial consequences, including loss of principal. Please see a prospectus for further details.

Indexes are unmanaged and cannot be invested in directly.

The S&P 500® Index, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500
large companies having common stock listed on the NYSE or NASDAQ.

With a fixed number of 600 components, the STOXX® Europe 600 Index represents large, mid and small capitalization
companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It is
derived from the STOXX® Europe Total Market Index (TMI) and is a subset of the STOXX® Global 1800 Index.

The NASDAQ 100 Index includes 100 of the largest domestic and international non-financial companies listed on The
NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups
including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not
contain securities of financial companies including investment companies.

MSCI Emerging Markets Index: A float-adjusted market capitalization index that consists of indices in 24 emerging
economies.

The MSCI AC (All Country) World Index: Captures large and mid-cap representation across 23 Developed Markets (DM)
and 24 Emerging Markets (EM) countries*. With 2,791 constituents, the index covers approximately 85% of the global
investable equity opportunity set.

The Dow Jones Industrial Average (DJIA) is a stock market index of 30 large U.S. companies created by Dow Jones &
Company co-founder Charles Dow. First calculated in 1896, the DJIA is currently owned by S&P Dow Jones Indices, which
is majority owned by S&P Global.

Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority
stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to
the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under
license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in
any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

Copyright © Russell Investments Group LLC 2020. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written
permission from Russell Investments. It is delivered on an “as is” basis without warranty.

UNI-11602

                                     Page 5, © 2020 Advisor Perspectives, Inc. All rights reserved.