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Does the Coronavirus Change the Outlook?

Tuesday, February 11, 2020

During a very eventful start to 2020, the world’s attention has been set on the serious and significant spread of the Coronavirus. A contagious, life-threatening respiratory disease, it has infected nearly 50,000 people worldwide and has killed over 1,000 people, the majority in mainland China. While our focus here is the potential economic and financial market impact of the Coronavirus, we do not want to leave unacknowledged the reality that humans are suffering. Our hearts go out to the families and loved ones who have been affected by this tragedy.

Even disease experts acknowledge that it is irresponsible to make a forecast on how long the outbreak will last, how far it will spread, and what the ultimate economic impact will be. What we do know is the Coronavirus is serious enough that a few large Chinese cities are on lockdown, some companies with factories in Wuhan are suspending operations, and several countries are enforcing travel bans to and from China. When the world’s second largest economy undergoes a disruption of this magnitude, global growth will slow. The degree to which this will impact US growth will depend on unknown future developments.

The response of financial markets has been mixed. Taking into account this problematic outlook, commodity prices have fallen. Year to date, WTI crude oil has plummeted -17.5%, copper -8.4%, and iron ore -10.8%. Likewise, the economy-sensitive S&P 500 energy and materials sectors have dropped -10.1% and -2.2% respectively, and emerging market stock markets, measured by the iShares MSCI Emerging Markets ETF, the EEM, have dropped -3.4%. On the other hand, the S&P 500 Index as a whole has continued its upward march, rising 3.2%, with technology, communication services, and utilities outperforming.

Marietta’s most recent Economic and Financial Market Outlook (January 10) was modestly optimistic based on cooling trade tensions, easy monetary policy, a strong US consumer, a return to corporate profit gains, and a global growth rebound that would reduce recession fears. Thus far, these core fundamentals remain unchanged: trade tensions continue to diminish, monetary policy remains supportive of growth, corporate earnings are still expected to rise, and US consumer spending has been relatively unimpeded by the Coronavirus. We no longer project a global growth rebound, but we continue to think that recession fears will stay low, provided a significant outbreak does not reach US shores. Thus, our outlook is relatively intact and supports the case for higher global stock markets.

We expect there will be winning and losing sectors and companies, which could provide an opportunity for active portfolio management to help mitigate portfolio risk and increase returns. The longer the pandemic takes to resolve, the greater the negative impact will be to industries such as travel, autos, oil, some luxury goods, and commodities. Companies with supply chain disruptions should be monitored closely for downward earnings revisions. We recommend caution in “buying the dip” in these industries until the magnitude of the global economic impact is better understood. Even if the virus is contained quickly, companies should be reevaluated in the context of a slower than expected global economy. We will be tracking developments closely, especially regarding a potential disruption to US consumer spending. We all wish for a swift end to this serious threat.