Update Note on the Coronavirus
Given the market correction over the past two weeks to coronavirus developments in the United States and abroad, we wanted to reach out to our clients and friends and provide them with our latest observations.
Equity markets last week corrected sharply to the spread of the coronavirus around the globe with the S&P 500 declining more than 10% on the week. Markets are increasingly pricing in the possibility of an economic downturn caused by the developing pandemic. China, the epicenter of the virus, is expected to be hurt the most due to the paralysis of commerce in that country so far this year. Far more uncertain is the economic impact that the coronavirus might have in Europe and the United States either directly because of a rise of cases around the world or indirectly through the impact of China on businesses and consumers around the world. The OECD now projects that Chinese economic growth in 2020 will not top 5% even under a best-case scenario. This is a revised estimate down from prior estimates of 2020 growth in the range of 5.7%. In the United States, the OECD projects GDP growth of 1.9% for 2020 down from a prior projection of 2% for the year. The fact that US economic growth currently is projected to only see a small dent in growth is somewhat reassuring. However, it is impossible to predict the economic impact and the extent of new cases and fatalities in the United States at this point.
We think that markets were primed for a long overdue correction given the strong performance of the S&P 500 in 2019 and early 2020. However, the S&P 500 experienced its swiftest correction in history last week. We believe that a lot of the negative sentiment and panic seen in the general public, as well as the markets, is not entirely justified. The market’s reaction to the coronavirus was far more negative than in previous cases of global virus outbreaks, like SARS, H1N1, Ebola, etc. As we noted last week, the number of cases of people who have contracted the coronavirus is still relatively small compared to the general population and the number of fatalities is even smaller. We do not intend to minimize the justified concern over the spread of this deadly virus, but rather place it in the proper perspective.
Going forward, it is increasingly likely that a global, coordinated central bank response will occur in the near term. This week the Federal Reserve announced a 0.50% cut to the fed funds rate – a welcome shot in the arm of confidence for the economy, yet it is questionable how much of an impact lower rates will have when the economic harm is being caused by a negative psychological reaction to a virus pandemic rather than a lack of liquidity or deterioration in economic fundamentals more generally. It’s apparent that the only real development that can change market sentiment significantly would be a slowing in the number of new cases and/or a viable vaccine or drug for treatment of infected patients. A vaccine, in our opinion, is at least a few months away.
The ultimate economic impact of the disease will depend greatly on how badly the international supply chain has been disrupted. With shortages of manufacturing goods, medicines, assembly parts etc. a great deal of damage has already been done to China’s industrial infrastructure and to companies, like Apple and other tech firms, that rely heavily on Chinese sources. It remains to be seen if more advanced economies, like the USA and Europe, which are more service based with lots of person to person contacts, will suffer the same kind of damage as China, if travel, both air and cruise ships, and personal movements are curtailed. The near future will tell! We believe the problem is serious, but the market, as usual, has overreacted to the crisis!