intellicents, inc. is the investment advisor for your organization’s retirement plan or individual financial matters. In addition to our regular monthly market commentary, we feel it is important to periodically communicate what is going on in the current environment. The outbreak of 2019-nCov, more widely known as the coronavirus, is first and foremost a human tragedy. Having said that, investors are left with the difficult task of forecasting and pricing an event that is very fluid. The equity “sell off” we experienced during the fourth quarter 2018 or the current market fears related to the coronavirus are important because volatility in recent years has been light and we haven’t experienced a bear market since 2011. A “market correction” means that the market index is down 10% from a high point. A “bear market” generally entails that an index is down 20% or more from the most recent high point.
Although we are still a “ways off” from a market correction at this time, the current sell off in stocks due to the growing concern of the coronavirus remains unique as it comes on the heels of a four month, largely uninterrupted rally. The period of calm ended recently as the coronavirus is spreading outside China at a faster pace than previously reported, and that this outbreak may jeopardize global supply chains and the global economic expansion. Although it is difficult to predict when the virus will be contained and how many more lives might be lost, we felt it would be helpful to provide some historical perspective on other major global health events to help assess potential market impact.
Below are some recent performance figures on a few major indices through February 24th:
How widespread is the coronavirus and how does it compare to the annual “flu” and other global health events?
Although data about the coronavirus and its growth are questionable, given that a large part of it is coming from China’s Communist Party—there are some reports that the virus is in the process of being contained. Even as cases tick upward globally, the World Health Organization declined to declare the outbreak a pandemic on February 24th, saying the rapidly spreading disease has “pandemic potential” but is not yet at that stage. As of the end of the day on February 24th, confirmed cases were approximately 78,000, with a cumulative death toll of 2,663. By way of comparison, the SARS outbreak in 2002/2003, took eight months to contain, infected 8,098 people and killed 774. That made for a fatality rate of nearly 10%, which is much higher than the death toll for the 2019-nCoV. In addition, through January 31, 2020, more than 8,000 people in the U.S. have died from this season’s influenza, according to the CDC. During the 2018-2019 season, the CDC estimated that more than 34,000 people died in the U.S. from the flu and the prior season saw 61,000 deaths.
What are the potential long-term effects of the Coronavirus on the Economy?
The long-term macro effect seems to be minor at this point compared to the impact of the China/U.S. trade war. In the short term, China’s GDP will likely fall. Economists estimate that China’s GDP for the first quarter might fall between 0% and 2%—a fairly low number. Today, however, China makes up roughly 20% of global GDP compared to 5% in 2003 during the SARS outbreak. As a result, China’s impact on global GDP is more crucial than in 2003. It will likely involve a one-to-two quarter economic data distortion and will be a hit to the global services sector, which is a pillar of global growth. It is likely that China’s GDP will fall to 4-5% in the first half of 2020, but many economists still predict that global GDP will be positive.
In summary, the demand shock from the largest quarantine ever will be substantial. China is a key component in global supply chains, particularly in technology, and the challenges may not be solved very quickly. A crucial factor will be whether the virus spreads from the Chinese province of Hubei (which is not a huge player in the technology supply chain) to a province like Guangdong, which is a large part. The trick is going to be: Is this a one or two quarter event or something more permanent? That remains to be seen. Up until the emergence of the coronavirus outbreak, the first few weeks of 2020 were relatively calm. Monetary policy remains accommodative, and the global economy has been displaying early signs of recovery, which many people believe will take hold in the second half of the year. From a macroeconomic perspective, many investors do not expect the coronavirus outbreak to materially alter that narrative. In terms of positioning, for investors with well-diversified portfolios, we believe the best strategy is to stay the course. It rarely serves investors well to allow their investment strategies to be diverted by temporary challenges. Markets may yet experience a deeper pull-back due to the coronavirus outbreak but trying to time the market’s near-term peaks and troughs is rarely successful, and even then, typically more a function of luck than careful decision making. It is also important to keep in mind that bear markets and corrections are normal at some point in a given calendar year. As mentioned before, the recent period has been unique as the stock market has risen without much resistance the last few years. Intermediate-term economic growth, employment and corporate fundamentals remain pretty solid. So, the sell-off is a prudent reminder to everyone that long-term positive performance comes with more volatility than we have experienced in the recent past. Reviewing your current investment goals and objectives along with your risk tolerance is important in down markets as well as up markets. If you have any questions or concerns about your current situation, please give us a call at 800-880-4015 or send your advisor an e-mail. We would be happy to discuss your portfolio at your convenience.
Intellicents, Inc. has exercised reasonable professional care in the preparation of this material. We cannot, however, guarantee the accuracy of all information contained herein. Indices are unmanaged, and are not available for direct investment. Past performance is not a guarantee of future results.
The Bloomberg Barclays Capital Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Municipal bonds, and Treasury Inflation-Protected Securities are excluded from the index. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.
The MSCI All Country World Index –Ex U.S. is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world (except the United States). The MSCI ACWI – Ex U.S. is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets.
The Russell 2000 Index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for U.S. small-cap stocks.
The S&P 500 Index is comprised of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index - each stock's weight is proportionate to its market value. Investment advisory services offered through intellicents investment solutions, inc., an SEC registered investment adviser.
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