As concerns about the Coronavirus continue to rise, we feel it is important to reach out and comment on how the outbreak may influence the global markets and economy. Thus far, markets have reacted in a similar manner to prior health scares. Global equity markets closed down 2% last week while bond yields fell to the lowest levels since 2016. The situation, while still at an early stage, is evolving quickly hence the short to intermediate term market implications are still unclear.
Investors who saw stock markets continue their 2019 gains into the new year have now seen most of the recent gains evaporate on contagion fears. The virus dominated headlines over a remarkable week which saw the United Kingdom leave the European Union, the United States announce a new Mideast peace plan, the President sign the USMCA trade agreement and the Senate advance its impeachment trial of President Trump; all on the eve of the first democratic caucus.
Our 2020 Investment Outlook envisioned such volatility, given heightened policy uncertainties, late-cycle risks, and stretched valuations in some markets. We feel it is important to reiterate that volatility is normal and often is a positive for the markets. A potential pullback due to the Coronavirus would bring the valuation of the markets (currently at 18.2x earnings) more in line with longer term averages (16.3x earnings). When combined with recent positive earnings results, most analysts have raised their forecasts to 7% to 9% growth for the year. The increase should ultimately prove to be a tailwind for U.S. stocks once the market refocuses on fundamentals. For more details on volatility and corporate earnings, see pages 6 and 9 of our Economic Insights chart book.
Since China’s last health crisis, the SARS outbreak of 2003, its share of global economic output has grown from 4% to roughly 17%. At the same time, the composition of their economy has shifted from predominantly manufacturing to predominantly consumer related. China is now the biggest market for new cars and semiconductors, the largest spender on international tourism, the leading exporter of clothing and textiles, and the country that produces the highest global share of consumer technology gadgets (including the global supply of iPhones).
Considering that most Chinese factories have been closed due to the outbreak, it is very likely supply chains will remain clogged for a longer period even after the epidemic is under control. As a result, the economic ripples from this outbreak will likely be much larger than the estimated $40 billion SARS cost the global economy. While ultimately transitory, both Chinese and global GDP will come under pressure from this outbreak.
Remarkably, the S&P 500 ultimately finished the year higher during every recent global health scare – SARS in April 2003 (+29%), Avian Flu in June 2006 (+16%), Swine Flu in April 2009 (+26%), the Cholera epidemic of November 2010 (+8%), MERS in May 2013 (+29%), Ebola in March 2014 (+14%), and Zika in January 2016 (+12%).
Again, we would like to thank you for your relationship and interest in following our thoughts. We encourage you to contact your Wealth Management Team with any investment questions, concerns, or perspectives as 2020 continues to unfold.
You may reach us at 610-975-4300, or email firstname.lastname@example.org.
Mr. Heckscher is Senior Vice President, Director of Fixed Income, and Chief Investment Officer of Pennsylvania Trust.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.