Fear of Pandemic
It will likely be a few more weeks before we have a clearer understanding of the full economic impact from the corona virus. There will be a reduction in the earnings per share forecasts and it will be widely disparate depending on the industry. Travel and leisure being most affected. Still other industries will experience supply chain disruption. Automobiles, computer chips that require rare earth metals and pharmaceuticals. This should be temporary as manufacturing comes back online in Asia, China to be more specific.
Past Pandemics and Outbreaks and Markets
In response to the growing fears of the coronavirus, the Fed made an intermeeting interest rate cut. They cut rates by 50 basis points to bring the level down to 1.125%. They have also signaled they will provide liquidity for business that may need short term funding to deal with the supply chain constraints.
The last time we saw a collapse of energy prices like what is happening today was the end of 2015 into 2016. This creates pressure on the fracking industry and will cause exploration and extraction to slow. This will cause stress to the debt markets in high yield where many of these companies borrow. There will be earnings declines in the energy sector. This will lead to low cost of production for nearly all other sectors. Once the virus fear subsides there will be a tail wind for the rest of the economy that will return to previous economic activity. See our piece from the last energy sell off on our blog here.
We think that the US still should remain in expansion mode, especially considering the last jobs report. The warm weather will likely hasten the end of the coronavirus scare as flu virus do not like the warmer temperatures.
This means we are not lowering our equities exposure now and will keep you informed over the next few weeks.
Bryan D Beatty, CFP® AIF®
Your Team at EBW, LLC.