Stock markets have been falling dramatically this week, due to the effects of the Coronavirus. While infection rates are slowing inside China, they have begun to rise outside of China. Increasing numbers of cases in South Korea, Japan and Italy are causing concern. Evidence shows that the greatest mortality risk is for older people with pre-existing respiratory conditions – a fairly large subset of the Chinese population. While the number of cases confirmed in the U.S. remains relatively low, the potential for a more extensive domestic outbreak remains. We join the worldwide sentiment for those affected.
Apart from the human toll, the effect of the virus on markets has been substantial. The S&P 500 has declined more than 12% since reaching an all-time high on February 19th. While a pullback of that magnitude is not that uncommon, the speed at which it has occurred is certainly unnerving. With no safe havens in stocks emerging, money has been flowing dramatically towards bond investments – pushing yields on Treasury securities even lower.
Stock markets are based mainly on expectations for future corporate profits. We see that the potential negative economic effects of the virus are beginning to be reflected in prices. Reports from China are that people are scared and sequestering themselves at home. This could all lead to low (or even negative) growth in China for early 2020 and affect worldwide supply chains. The travel and energy sectors – those with closest ties to the effects of the virus – have been hit especially hard and will take time to recover. Until the virus is contained, it’s entirely possible that stock markets could fall further.
Without a doubt, the media frenzy surrounding this particular virus is contributing to the overall decline in investor sentiment. The most likely outcome is that the worldwide community will get the virus under control, it will take time to readjust economic supply chains, growth resumes and we recover. The record strength of the U.S. consumer, as discussed in Outlook 2020, serves as a ballast within this process. We will continue to carefully monitor the situation and follow developments. Our portfolio strategies are designed to weather volatility and our commitment to diversification remains intact. Please contact us should you have any questions or concerns.