Until Monday, it seemed that U.S. stock markets had largely ignored the coronavirus outbreak. While it seems so long ago, it was only last week that the S&P 500 was hitting record highs. However, in recent days, markets have sold off in dramatic fashion, including Monday’s 3.4% decline, the worst in two years.
While the coronavirus will have a substantial effect on China’s economic activity, we do not expect a significant impact to the U.S. economy. City National Rochdale estimates the hit to our Gross Domestic Product (GDP) to be in the area of 0.1-0.2%. Globally the impact may be much larger. When the SARS epidemic occurred in 2002, China made up only 4% of global GDP. Today they account for 16% of global GDP. Certain industries may be hit worse than others too. The Hubei Province of China is an industrial and transportation hub in the center of the country, producing automotive parts, electrical components, textiles and other goods used in the manufacturing process. Automotive manufacturers are very concerned about disruptions to their supply chain. Foxconn, a key component of Apple’s supply chain has already warned about a hit to its revenue due to the virus.
If the SARS epidemic is any indication, Chinese consumer demand should rebound quite quickly. So, the reduction in economic activity isn’t being lost, likely it is being postponed.
The good news, if there is much of it, is that the outbreak is occurring at a time when the global economy is recovering from the challenges of 2019. Trade relations seem to be thawing, while BREXIT has occurred and central banks around the globe have been injecting more and more stimulus into the economy. One other positive is that coronavirus concerns are hitting the U.S. just as Spring arrives, which typically coincides with a reduction in influenza reports. Perhaps the same will be said of the coronavirus. It is also worth noting that America’s adversaries may be embarking on a misinformation campaign surrounding the virus in attempts to create fear. While the virus is certainly a tragic humanitarian crisis, we just don’t see this becoming a significant economic disaster.
It’s possible the coronavirus outbreak was the catalyst for a market correction that was likely to happen anyway. 2019’s great market returns were not matched by similarly stellar economic metrics and stock prices were reaching somewhat lofty levels relative to corporate earnings. Remember, market corrections (selloffs of 10% or more) are very common and happen on average once per year. Occasional selloffs are a normal part of investing and you shouldn’t let short-term market events alter your long-term investing plans. At EBW, our portfolios are built based on the understanding that we will experience scary downturns from time to time. As our intermediate-term outlook for the U.S. economy has not changed, our advice is to buckle up and stay the course. This too shall pass.
As always, we appreciate your trust and confidence and welcome any opportunity to talk with you about your thoughts and concerns. Please reach out to your advisor if you would like to discuss this in greater detail.
All the best,
Your Friends at EBW
This information was taken from sources deemed to be reliable however Voya Financial Advisors is not responsible for the accuracy of this information. Any opinions/views expressed within the information does not necessarily reflect those of Voya Financial Advisors. In addition, they are not intended to provide specific advice or recommendations for any individual.
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