An Update on the Coronavirus
The coronavirus outbreak is still progressing and its full health and economic impacts are clearly not yet apparent. We should all have more clarity over the next few months.
We are hopeful the global health authorities can contain this outbreak. China took extraordinary efforts, including shutting down travel and quarantining an entire province. Its response has been much faster than in past epidemics originating from its shores. Our confidence is bolstered by the prospect of global cooperation. Our hearts and thoughts are with the families of victims, those infected, and those battling the spread of the disease.
The spread in China seems to have meaningfully declined, with daily cases having peaked earlier in February. Concerns now turn toward the spread outside of China. The virus has broken quarantine and is spreading notably in Korea, Europe, and here in the United States, which hits close to home. We are all affected by the personal fears we have for family, friends, and ourselves. But everything we read suggests that thankfully the coronavirus is much less dangerous than other epidemics over the past 20 years.
In terms of the economic impact, it now seems likely the coronavirus—and the global containment measures in response to it—will have a larger negative shorter-term impact on the global economy than our base case a month ago. We can’t rule out the potential for the virus to trigger an economic recession, even if the odds are still low. But assuming this doesn’t escalate further and turn into a severe global pandemic, the effect on the global economy seems likely to be relatively short-lived—maybe a one or two quarter hit, followed by a make-up period of several quarters of above-normal growth. It is unlikely to have a lasting, long-term effect on the global economy, but it would cause a delay in the current nascent global recovery.
Financial Market Impact
In terms of the financial market impact, history suggests that equity markets should start to rebound once the global rate of daily new virus cases peaks and starts to decline. That said, there could be more downside. If the virus news gets worse, it could lead to a sharper short-term drop in stocks and even a bear market. While the markets fell in February with great speed, it’s important to remember that U.S. stocks were up more than 3% year to date at the peak in February and up over 30% last year. That is the unusual occurrence, not the recent price correction, which is quite common historically. It is relatively normal to see 10- to 15-percent declines happen in the stock market about once a year.
We have often said we didn’t know what could cause volatility—and we don’t need to predict it. It could have easily been one of the many other risk factors—trade wars, political uncertainty—not to mention the higher than average U.S. stock valuations coming into 2020. Frequent and sometimes steep declines are the price we must pay in order to earn long-term gains as equity investors.
What Should Investors Do Next?
Tactically, it’s not prudent to try to sidestep a market decline or a recession based on a prediction that is very difficult to get right. Markets have successfully weathered several outbreaks in the past, including SARS, MERS, swine flu, and bird flu. During most of these, the stock market generated a decent return in the 12 months after the outbreak. However, we continue to follow daily reporting on the trajectory and spread of the virus and other developments. If the facts and circumstances change, our analysis and views on the economic and portfolio impact may change as well.
Our Chief Investment Officer, Adam Zuercher, published a blog post yesterday with his thoughts on how investors should handle the current situation. Please click the link below to read Adam's thoughts:
If you have any questions or concerns, please feel free to reach out to one of our Wealth Advisors to discuss your situation and investment objectives.