CORONAVIRUS AND THE MARKETS
By Mark Ukrainskyj in Trusted Advice
The newest coronavirus (COVID-19) came to the world's attention in mid-January when the Chinese government began quarantining the epicenter in the province of Wuhan. Travel restrictions were put in place and factories shut down, in an effort to contain the spread of the virus. With infections contained to China and a death rate (approximately 3%, but subject to change since tests are not widely available) far below that of other coronavirus outbreaks, such as SARS (9.5%) and MERS (35%), the U.S. markets took these developments in stride and continued their march to all-time highs. Even as the number of infections reached 80,000 people and spread to other countries, U.S. equities continued higher, pushed up by strong economic activity and a newly reached Phase 1 trade deal with China.
It wasn't until this past weekend, when Italy quarantined 50,000 people in its industrial heartland of Lombardy and South Korean infections neared 1,000 that the markets reacted. These events put the fear of a global pandemic and its accompanying economic disruptions in the minds of investors. Major companies such as Apple, Mastercard and United Airlines reduced or eliminated earnings guidance due to the effects of the virus. These fears caused the S&P 500 and Dow Jones Industrials to fall over 100 (-3.3%) and 1,000(-3.5%) points respectively on Monday. This was followed by a further drop of 97 (-3%) and 879 (-3.15%) points on Tuesday. After Wednesday’s small decline, news Thursday morning (2/27/2020) of the first U.S. case of unknown origin pushed S&P 500 futures down over another percentage point to a total loss of over 9% from their recent all-time highs.
Overall, the global response to COVID-19 has been swift and unprecedented. China mapped the virus' genome in a matter of weeks and shared it with the world. There has already been a vaccine submitted for testing in humans and other already approved drugs are being tested for their ability to combat the virus. To contain its spread, general travel restrictions and quarantines for those possibly infected are widespread. However, some of these very measures are disrupting supply chains and dampening consumer activity and demand globally. Should quarantines and shutdowns become widespread in Europe and the United States, the economic effects would only be magnified.
Given its rapid spread and the fact that some people may be infected yet feel fine (as did 14 Americans on a Japanese cruise ship), the likelihood that COVID-19, will be contained is limited. It most likely will break out here in the United States at some point. According to experts, it will likely be similar to influenza, which while it can be life threatening to people with chronic conditions, weakened immune systems and the elderly, most people can get through without medical care. In fact, with its mix of relatively low fatality rate and long infection time, many epidemiologists believe, COVID-19, may turn into a new seasonal disease such as the flu.
While not minimizing the human toll, from a market point of view, the key question is how much disruption will it cause by the time it runs its course? Most years, the market corrects between 3 and 20%, while still generally putting in solid positive returns for the year. With the S&P 500 down approximately 7.5% from its high, for those with cash on the sidelines, it may be time to start putting some of it to work. In the meantime, we at Covenant will be taking the opportunity to upgrade positions when indiscriminate selling gives us the opportunity to do so. On the other side of the ledger, mortgages are generally priced off the 10-year U.S. Treasury bond. In Tuesday’s rush to safety, the 10-year yield hit an all-time low of 1.317% intraday. Those with mortgages might consider refinancing.
In the short term, we don’t know how long the COVID-19 outbreak and its accompanying disruptions will last. Based on historical experience with similar viruses, it will likely run its course over the next few weeks to months. Over this time, the markets may experience more volatility as outbreaks may occur in the U.S. and other countries. As better testing becomes widely available and governments get a solid handle on the virus’ effects, fear should subside. With a still strong U.S. economy and low interest rates, the markets should then get back to their longer-term upward trend.
Mark Ukrainskyj in Trusted Advice