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Coronavirus Letter

Coronavirus Letter

| March 06, 2020

Recent panic caused by the spread of the coronavirus (COVID-19) has led to a stock market decline and has many investors feeling anxious. While portfolios will see ups and downs and this is a normal part of investing, the recent sell-off was sharp. And until medical science gets the virus under control, we expect to see heightened volatility in the market … although that doesn’t necessarily mean a long-term bear market. In the meantime, we want to provide some perspective on how we see these issues playing out.

One death is too many, but let’s put this virus outbreak into perspective. On the Center for Disease Control website, it says during the 2019 to 2020 winter flu season there have been: 32,000,000 to 45,000,000 flu illnesses and 18,000 to 46,000 flu-related deaths. Because influenza surveillance does not capture all cases of the flu in the U.S., the CDC provides these estimated ranges.

Revenues and earnings from companies doing business with China will definitely be impacted, as will manufacturing/trade/travel etc. This could also have some ripple effect. There has so far been no significant impact on the strong labor market. The main concern is supply disruption during this outbreak. But on the positive side, many companies were already moving supply chains from China due to the trade war. Moving forward, that trend will probably accelerate.

Though the impact on human life is at the forefront of everyone’s concerns, there are many uncertainties surrounding the potential impact of the virus to the global economy. The global economy was already fragile from the nearly two-year-long U.S.-China trade war and the spreading virus will likely impact economic growth. While more equity market weakness is possible as the virus continues to grow globally, the downside could be limited as governments and global central banks have possible tools to combat the potential death toll and economic impact. Or could the result be a national, regional, or world-wide recession? That remains a possibility … stay tuned on that one.

From the human life perspective, China took severe steps to limit the spread of the virus including forced quarantines, limited social contact, and significant population testing. We expect other inflicted nations to follow suit. From an economic perspective, global central banks including the People’s Bank of China and the Bank of Korea have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap. Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape.

The most important question for investors is not whether there might be a severe market correction and/or recession coming. The answer to that question is always “yes” … we just never know in advance when that might happen nor what might be the trigger. Rather, the important issue is whether or not their portfolio is positioned to withstand such events.

Keep in mind that we have been expecting a recession for several quarters now and have planned for it. (We just didn’t anticipate that it might be triggered by a virus). Being diversified, or not putting all your eggs in one basket, is very important in times of uncertainty. This is especially significant now, as equity prices are coming off all-time highs and bond prices are also high, as their yields have fallen to all-time lows.

Our team will continue to monitor the spread of the virus as well as its economic and market implications. If you have any questions whatsoever, please do not hesitate to contact us.