We have written previously on 01/27/20, 02/14/20 and 02/24/20 offering our perspective on the evolving coronavirus narrative.

While the situation in China continues to improve, spread of the virus outside of China has ignited fears and the financial market response has been both swift and severe.  These circumstances are unnerving, but also decidedly transitory – the only real variable is time.

Below, we provide our objective evaluation of the status of the virus and the market’s reaction.  Based on an otherwise encouraging economic backdrop entering the year, we question whether the recent sell-off isn’t short-term panic over longer-term prudence.  We remind our clients that times like these are when appropriate portfolio level asset allocation decisions and discipline are most important.  If you find yourself wavering on either, please reach out to me, or any member of our team.

Improving situation in China.  As of this writing, there have been 84,000 confirmed cases worldwide.  About 79,000 of those cases were confirmed in mainland China where the virus originated.  The situation in China is improving with each passing day as measured by “active cases” (total cases less discharged patients) which peaked near 60,000 on 2/17 (eleven days ago) and have declined to less than 40,000 today.  Importantly, China is slowly beginning to get back to work with the economy running at an estimated 60%-70% compared to 50% one week ago according to Bloomberg News.

Outside of China is a different story.  There have been about 5,000 confirmed cases outside of China, or 4,300 adjusting for a cruise ship quarantined off the coast of Japan.  The virus has been reported in 45 countries outside of mainland China with larger concentrations in South Korea (2,337), Italy (650), Iran (388) and Japan (210).  More new cases are being confirmed outside of China than within China each day and global efforts to contain the virus (travel restrictions, school closings, event cancellations) are weighing increasingly on economic output.

Global flight to safety.  The numbers speak for themselves. This week, the S&P 500 sold off more than 10% in a precipitous decline that moved domestic stocks from record highs to correction territory in just four days.  In a classic flight to safety, demand for U.S. treasuries pushed ten-year yields down 21 bps to 1.26% as of yesterday’s close and gold trended higher as well.  For what it’s worth, equity drawdowns of this magnitude are actually more common than most might realize.  We have experienced 18 examples since WWII or one every four years on average.

Source: Bloomberg, data through February 27, 2020.

Unnerving but transitory.  The continued spread of the disease outside of China and the market’s response is admittedly unnerving but both will prove transitory.  The only real question is how long each will take to pass and we believe the answer will be measured in weeks and months as opposed to years.  There will be a measurable economic impact in China and around the world and the extent of that impact will inform 2020 earnings potential for companies, the uncertainty around which is causing the selloff in our opinion.  Fortunately, stock prices reflect all long-term future earnings, not just the outlook for one year.  As the virus becomes contained, the global economy will reaccelerate (as is already happening in China) and investors should reconsider stock prices through a more rational lens.

Back to basics.  Arguably the MOST important investment decision you will ever make occurs when you and your advisor determine the appropriate high-level asset allocation for your portfolio (simply the ratio between stocks and bonds).  That one decision is based on a deep understanding of your unique goals and circumstances, and your ability and willingness to take risk.  The short term can be exceedingly unpredictable, but over the long term we know that we should expect some bumps along the way.  Over the long term, we know we will experience recessions, presidential elections will occur, geopolitical tensions will ebb and flow, and from time to time issues (like the coronavirus) will present from left field.  Your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens and maintaining discipline during periods of uncertainty is the most reliable course for growing and preserving wealth.  Please contact any member of our team if you have questions.

Sources: Bloomberg, LP; World Health Organization; National Health Commission of the People’s Republic of China