The recent developments in China and now through much of the world with Coronavirus have been dominating the headlines over the last couple weeks, and for good reason. At this time there have been over 80,000 diagnosed cases and over 2,800 deaths. There’s still a lot of uncertainty around how severe the spread of the virus will be. In addition to the concern for the impact on global health, there is concern over the resulting impact on global trade, global economies, and global financial markets. And financial markets really don’t like uncertainty. We’ve already seen a significant number of US companies give warnings that their revenue and earnings for the current quarter are likely to be lower than previously expected as a result, and the impact in Asia and Europe may be greater than it is here. As I write this, the S&P 500 is off about 12% from its February 19th high.
So, what does that all mean for our decisions about various investments? The truth, of course, is that none of us in the financial services industry has a crystal ball available to us in order to know for sure, though I’ll try to provide some perspective based on the research I’ve done to date. Let’s start with a few questions that we can actually answer.
Have we seen anything like this before? Yes, we have. Since 1980, we have experienced the HIV/AIDS epidemic, SARS, Avian Flu, Swine Flu, and multiple Ebola outbreaks. Each time, there was a high degree of anxiety around what the short-term and long-term impact of the disease would be. And each time a path to addressing it eventually became clear and markets settled back to normal. The degree of the economic impact of each of these was a little different, yet in every case the initial fears proved to be overblown. If we look back even farther to the 1918 influenza pandemic and the 1957 Asian Flu, we also see that financial markets remained strong during highly volatile global health situations.
Is it different this time? Yes, and no. Each of these previous examples had unique characteristics, and the Coronavirus is no different. There are differing degrees of transmissibility, mortality, and economic disruption with each situation. Perhaps the most significant difference this time, however, is the 24/7 news cycle that gives us the latest update every time we see a television, pick up our phones, or turn on our computers. The world is much more inter-connected now than in any of these past examples. We can also note similarities in how each of these crises played out in terms of global health impact and in financial markets, including the recovery from the initial panic and transition back to normal levels of volatility and returns.
How long will this go on? There’s no clear answer yet, though again we’ll look to history as our guide. Based on past cycles of the examples given earlier, we’re likely to see the number of cases continue to grow in the immediate future, but most predict a peak of cases in the relatively near future followed by a predictable decline as has been seen with previous epidemics/pandemics. The impact on the economy and financial markets is also likely to peak in the relatively near future, with consensus being a slowdown of US economic growth of only 0.25-0.50% for 2020 compared to previous estimates. There is certainly going to be a greater economic slowdown in China and other parts of Asia, but global economic growth is still projected to be positive for the year. Most of the slowdown will be experienced in the first half of the year, and we’re actually likely to see a re-acceleration of the economy during the second half of the year. Some of the economic losses will be slower to come back (i.e. factories sitting idle), but in other cases economic activity is just being deferred from now until later when things settle back down.
Is my portfolio going to be OK? Again, we cant really know if we’re going to have more turbulent markets before we see things calm down. The single most important thing to remember right now is that we’ve worked together to develop a portfolio and strategy that is fit to your situation. My goal is not to imply there’s nothing to worry about, just to remind everyone that even for clients with aggressive growth as an objective we use well diversified portfolios. Almost everything connected to equity markets has experienced a decline in the last week, yet not all the news is bad. Many bond funds have rallied nicely year to date and have been exactly the stabilizing influence on portfolios that they are supposed to be.
If you have questions about how your portfolio is positioned and you’d like to have a conversation about it, please call or email Vantage Point Wealth Management and we will be happy to talk with you more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.