February 4, 2020
According to the CDC, 45 million people in the U.S. got sick from the flu between 2017 and 2018, leading to over 61,000 deaths.1 Yet the coronavirus is causing much greater concern than the flu.
Now, the World Health Organization (WHO) has declared the outbreak a public health emergency. Entire cities have been shuttered in China, and international flights have been suspended until the spreading of the virus is contained.
Stocks have sold off as investors have sought the safety of bonds and gold, which is a typical short-term response to shocks of uncertainty in markets. That is to be expected for now, as the number of people infected continues to grow, both in and outside of China.
Why should markets be impacted by concerns over the virus?
The need to draw larger protective boundaries in order to contain the spread of the virus could lead to a general slowdown in economic activity for a time, with an uncertain end. Some analysts expect around a 0.4% hit to China’s 2020 GDP and have lowered growth expectations to 5.5%.2 Given that China is the second largest economy, the estimated hit to global GDP growth could range from under 0.2% to 0.3%. But either scenario still places global growth above 3% for the year.
Of course, most of that hit will be felt over the next quarter or two, which is in stark contrast to recent expectations of growth. For instance, 90% of the S&P 500’s returns last year came from increased investor confidence, not actual earnings growth. The markets have been bidding up how much they are willing to pay for stocks based on the expectation that future growth will materialize. A scare like the coronavirus puts a check on that confidence of whether economic growth will catch up with valuations.
We’re not experts on pandemics, and we do not know what the future holds. But, we do believe the global economic system is resilient enough to withstand this challenge. Here’s why:
- Global authorities are taking this seriously and coordinating efforts to control the contagion. This is an important lesson learned from the 2003 SARS outbreak when China hid the problem for a time.
- The coronavirus appears to be less severe than SARS. For instance, the mortality rate of the virus so far appears to be a lower 2% compared with almost 10% for the SARS outbreak that killed 800 back in 2003.3
- The consumer is still in good shape, central banks are accommodative, and there don’t appear to be imbalances of leverage in the system that could be toppled from this scare.
- Historically, markets have proven to be very resilient to all kinds of pandemics, with sell-offs proving to be temporary (see chart below).
Source: FactSet. Global stocks measured using MSCI World Index, which captures large- and mid-cap representation across 23 Developed Markets countries.
For those reasons, we believe this is most likely to be a short-term market event with only temporary economic setbacks. Tourism and exports of U.S. goods are most likely to be affected.
For now, the expectation is that the near-term market impact is making global stocks slightly more reasonably priced and bond valuations more expensive. Of course, there is no way of knowing how global events could evolve going forward. At this time, we do not anticipate that this current source of volatility will negatively impact our clients’ ability to achieve longer-term goals. Therefore, we see no reason for investors to change their investment positioning based on the uncertainty of the virus.
As always, we are monitoring the situation closely and its impact on markets, recognizing that negative surprises are something for which we should be mentally prepared. Our investment decision-making process doesn’t predict future outcomes; rather, we look for opportunities that may emerge if the markets over- or underreact relative to fundamentals.
Although we have discussed the economic and market impacts of the virus, we would be remiss if we didn’t recognize the very personal and human element this event brings to families. We extend our deepest sympathies to those affected.