February 2020 Market Commentary
Coronavirus and Market Update
Fear over the coronavirus (COVID-19) has reached new levels this week, driving stock prices and bond yields precipitously lower. As the market continues to assess the impact of coronavirus, we wanted to share an update on what we know about the virus and our thoughts on the potential economic and market implications.
Coronavirus – What We Know, Current Updates & Historical Comparisons
New information on the coronavirus continues to arrive daily, but the peak magnitude of the epidemic and the full extent of the economic implications are still unknown at this point. Furthermore, we are not immunologists or virologists. However, we have attempted to synthesize the information that is available.
As of the beginning of this week, there were 80,088 confirmed cases and 2,699 deaths worldwide, with only 57 confirmed cases so far in the U.S. To put this number into perspective, according to the World Health Organization there have been about 15 million flu related illnesses and 8,200 flu related deaths in the United States alone over the 2019-2020 flu season. Furthermore, according to the CDC (Centers for Disease Control), the SARS virus of 2002/3 saw 8,096 confirmed cases with 774 deaths (a roughly 10% death rate). The data, up to this point at least, tells us that the death rate from the COVID-19 is higher than that of the normal flu, (roughly 2% versus 1%), but much lower than that of SARS. The most concerning component of COVID-19 is that it is highly contagious and has a long asymptomatic incubation period of up to 14 days, meaning carriers that do not know they are sick can spread the disease to others for a longer duration when compared to flu, SARS or other viruses. We do not yet know to what extent the virus will spread. Researchers are working diligently on a drug to combat the virus and progress is being made quickly. In fact, a drug is already moving towards phase-1 clinical trials; it took nearly 20 months for this to happen for SARS back in 2002/3. Experts are also optimistic that seasonality and warm weather will help further combat the spread of coronavirus in the Northern Hemisphere as we head toward spring.
From an economic & market perspective, the unprecedented response by the Chinese government beginning in January, which has seen the quarantine of tens of millions of Chinese citizens across multiple major cities, will certainly delay China’s economic recovery that was beginning to take hold following the phase one resolution of the trade war with the U.S.. This halt in regional activity is likely to have a significant impact on Chinese GDP through declines in tourism, transportation, retail and manufacturing. China’s economy now represents roughly 16% of global GDP, so a slowdown in China will have a larger impact globally than it once did. Revenues and earnings from companies that are highly exposed to China will certainly be impacted on a greater scale. However, slower earnings in the first half of the year should be made up by a strong rebound in the second half of the year as manufacturing, trade and tourism resume.
Economic historians have looked to SARS and Bird Flu for hints at what might be to come. In both cases, we saw a short-lived economic disruption followed by a sharp recovery. As for the stock market, it followed a similar “V-Shaped” pattern. As shown in the graph below, in 2003 during the SARS outbreak, the S&P 500 Index fell by 12.8% over a 38-day period. At the end of 2015 and into 2016 during the Zika virus scare, the S&P 500 Index fell by 12.9% and the market recovered to reach new highs shortly following both episodes.
While we do not want to diminish the impact or severity of COVID-19, or the impact it’s having on families and communities around the world, we believe that its economic impacts will be transitory as has been the case with similar outbreaks in the past. The fundamentals of the U.S. economy remain on solid footing, and we do not see this dramatically changing that. There will likely be a slowdown in growth and some companies and industries will struggle for a time, but this will likely be short-lived, and not a catalyst for a larger economic change or recession. Don’t panic, stay invested and wash your hands…
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.