Coronavirus: Market Update

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Equity markets in January were able to shrug off headlines about missile strikes on Iranian Generals, continued unrest in Hong Kong, Brexit and Impeachment to hit all-time highs at midmonth. It took rising concern over the human tragedy and economic consequences of the coronavirus, centered in the city of Wuhan in central China, to finally shock investors. The virus was originally detected in December and has spread throughout the city with a population of 11 million. A slow initial response by Chinese health officials has now been met with an impressive global response. The fear of a global pandemic captured investor attention during the last week of January, leading to a sell-off that wiped out the early month gains in the U.S. and served to depress emerging market returns around the world.

What we know

  • As of this writing, there are 17,390 confirmed cases worldwide with 362 deaths. All but one death has occurred in China.
  • The coronavirus is a pneumonia like illness that has spread to roughly two dozen countries.
  • While the virus has been able to spread rapidly through human-to-human contact, its lethality does not appear to be as deadly as prior health crises. Ebola killed half the people it infected and SARS killed 9%. The mortality rate of the coronavirus appears to be roughly 2.2%.

  • What to expect near term (1 month)
  • Chinese markets opened this morning after being closed for the lunar New Year holiday and declined by 8%. European markets rose slightly and U.S. futures indicate a positive opening. Chinese officials have committed to providing ample liquidity to ease the strain on markets.
  • Emerging market equity indices will most likely be very volatile due to China’s increased significance. During the 2003 SARS outbreak, the Chinese economy was much smaller, representing just 4.4% of Global GDP. As of 2018, that share has risen to 17.2%, the second largest economy in the world. After the U.S., China now comprises over 30% of the MSCI emerging market index.
  • Economic activity in China should slow as several provinces have already announced plans to extend the lunar New Year holiday for another week. Global supply chains will probably be impacted by the slowdown as well as commodity markets.

  • What to expect longer term (6 months)
  • China’s economy was already slowing with GDP expanding by 6.1% in 2019, the slowest rate in almost three decades. We believe a further slowing in China will have global repercussions for growth, inflation and throughout financial markets.
  • Our forecast for increased volatility in U.S. equity markets remains in place because uncertainty over China will likely add to political uncertainty as the Iowa caucuses start this evening. Primaries in New Hampshire this month and Super Tuesday in early March will presumably exacerbate the uncertainty of the political outlook.

  • Our advice
  • We believe U.S. equity markets are still attractive and a normal allocation is justified. In prior health crises, the market rebounded after several months.
  • We believe slower economic growth will help the Fed maintain its low interest rate policy and may lead to lower rates by year-end.
  • We believe market volatility will present opportunities for us to harvest tax losses that can be used to offset gains in client portfolios.

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The economic and market views and forecasts above reflect People’s United Advisors’ judgment as of the date of this publication and are subject to change without notice. Views and forecasts are estimated based on assumptions, and may change materially as economic and market conditions change.

PUA has no obligation to provide updates or changes to these views and forecasts. Certain information contained herein has been obtained from third parties. While such information is believed to be reliable for the purpose used herein, PUA assumes no responsibility for the accuracy, completeness, or fairness of such information.

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PUA is not soliciting any action based on this material. It is for general informational purposes only. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.

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