by
Badgley Phelps
| Feb 26, 2020
The recent outbreak of the coronavirus has introduced volatility in what had otherwise been a rather complacent market. When COVID-19 was officially recognized by China, their government initiated extreme lockdown conditions in Hubei province. Earlier this month, the growth in new cases in the region started trending lower and the coronavirus initially seemed contained within China, or at least the Pan-Asian region. This generated hope that it was subsiding and would remain primarily as a localized health issue. Unfortunately, there has been an increase in cases reported in other parts of the world with the recent flare ups in Italy and Iran.
The coronavirus is a serious health issue. While the human impact is clearly the primary concern, there is also a global economic effect and that has generated volatility in the financial markets. In the U.S., the financial impact to date is a heightened level of concern that has generated falling stock prices and rising demand for safe haven assets such as U.S. Treasuries. In terms of specific stocks, companies in segments such as energy, industrials, travel and those with a retail presence in China are likely to be most heavily affected. In addition, companies that source products or inputs from China are likely to experience supply chain disruptions causing at least a temporary hit to earnings.
We have been fortunate. There are few recent historical cases of viral outbreaks and no one can say exactly how the coronavirus will progress. However, a study of recent market history can provide context. A review of the outbreaks of SARS, H1N1-swine flu, the Ebola virus and the Zika virus indicate that public health issues can take an enormous human toll. These outbreaks were all brought under control and the financial impact in each case was limited. In some cases, heightened levels of fear led to a sharp sell-off in equity prices, but the market rebounded relatively quickly. We cannot say that the same pattern will occur again, but history suggests that a patient approach is prudent.
It is too soon to determine the potential economic impact of the coronavirus. Earnings for the first quarter will undoubtedly be negatively impacted, but that may only be a temporary setback if the virus is brought under control. In terms of the economy, we may experience a slower growth rate, but loose monetary policy combined with sustained fiscal stimulus should help cushion the blow. Furthermore, the Federal Reserve can lower interest rates providing additional stimulus, if needed. In fact, the current Fed Fund Futures contracts indicate that between two to three interest rate cuts are anticipated by the end of 2020.
The outbreak of the coronavirus is of serious concern, but the ultimate economic consequences remain in question. In the coming days and weeks, we will closely monitor developments to assess the impact and determine if more aggressive action is necessary. Of course, we will keep you apprised as our thinking and approach evolves.
