March 3 2020 Market Update

Coronavirus: Impact and Implications

Markets fell sharply in the last week of February as Coronavirus (officially, COVID-19) concerns spread, marking the worst single week for the S&P 500 since 2008.[1] On March 3, 2020, the Federal Reserve cut intrest rates by one-half point as an emergency measure, marking the first inter-meeting rate cut since 2008.[2]

In comments to the press, Fed Chairman Jerome Powell said, “My colleagues and I took this action to help the US economy keep strong in the face of new risks to the economic outlook.”

Fears about the virus’ spread in the US (as of March 2, 2020, six people have died in Washington State[3]) have also reached consumers. Anyone shopping over the leap year weekend may have noticed diminished inventory for non-perishables, and the Surgeon General has urged consumers to stop buying protective face masks for fear that medical workers will face a shortage.[4]

The question is: to what degree is this panic warranted? Will COVID-19 impact markets, the economy, and our health and safety as a nation?

Global business impact

As of March 1, 2020, there were 89,000 confirmed cases of COVID-19 around the globe, with initial cases being reported in the US, Belgium, Germany, and Saudi Arabia. Antony Fauci, a highly regarded infectious-disease expert at the National Institutes of Health, described the spread of COVID-19 as reaching “outbreak proportions and likely pandemic proportions.”[5]

The Director-General of the World Trade Organization said that the impact of the disease on the global economy would “likely be substantial.”[6] China’s factory index fell to its lowest level since the index was enacted in 2004, with the impact spreading across Asia throughout February. The manufacturing sector has since begun to come back online, though economists expect it to be some time before activity returns to previous levels.[7]

It may take time for the full impact of the virus’ spread and to be felt by global businesses. Two key concerns are with a drop in global demand for products and services (say, for air travel) and on industries that rely on localized production, like electronics. With manufacturing in the US hovering just within expansionary territory, there could be an impact as the effects of the outbreak spread.[8]

Economic impact

Overall, there is likely to be an impact on the global economy, though gauging what it might be is a difficult exercise. Citigroup has revised its 2020 Global GDP forecast to 2.5 percent growth from 2.7 percent, though analysts caution that the ingredients of an actual bear market are not in place, at least in their view.[9]

It’s useful to keep in mind that US businesses at least have been adapting to a potential shift away from China in the global supply chain for the better part of two years at this point – a result of uncertainty in light of the trade war.[10] In this case, there could be some degree of protection afforded by any contingency plans made under those circumstances.

Also, we think it’s important to keep in mind that global policymakers have been very vocal about their willingness to step in and support economic growth in light of the outbreak. Many expect the Federal Reserve to cut rates over the coming months – while this might not assist in the case of production delays or manufacturing stoppages, it can provide liquidity and credit availability to businesses affected by the virus.[11]

The bottom line for investors 

It’s very easy to get wrapped up in the news and allow fear to drive decision-making. However, we strongly caution against reacting to the market. The “animal spirits” that take hold of markets from time to time are unpredictable to some degree, which is why your investment policy accounts for them ahead of time.

In fact, for some investors, times of panic can afford an opportunity to rebalance strategically in accordance with that investment policy. But right now, the markets have gone into March remaining incredibly volatile, which is why our key recommendation is calm and patience.

Please get in touch if you’d like to discuss any aspect of the outbreak or its potential impact on your portfolio, and thank you as always for your continued support.

JSF Financial