Nicholas A. Juhle, CFA®

Senior Vice President, Director of Research

Perspective on Wuhan Coronavirus Outbreak

Concerns over the human and economic impact of the coronavirus outbreak in China have driven a financial market flight to safety in recent days.  The outbreak invites anxiety on the heels of a sustained rally in U.S. stocks that occurred despite looming issues including a presidential impeachment, ongoing global trade negotiations, and a flare up between the U.S. and Iran.  We understand the market’s reaction, and acknowledge that the issue is actively developing. However, we note that the scale of the outbreak is still minimal in the grand scheme, and past outbreaks have not driven the level of disruption to the economy and markets that some initially feared.

Asset Class Change since
1/20/2020
 
US Stocks -2.14%  
Developed International Stocks -0.54%   * as of Friday, January 24th
Emerging Market Stocks -2.29%   * as of Friday, January 24th
10 Year Treasury Yield -16.5 bps  
Gold +1.34%  
Oil -9.79%  
Source: Bloomberg, LP  Key: US Stocks = S&P 1500 Index; Developed International Stocks = MSCI EAFE Index; Emerging Market Stocks = MSCI Emerging Market Stock Index; Gold = Spot Gold in USD; Oil = Generic Crude Oil Futures Contract

As of this writing, there have been 2,804 confirmed cases of coronavirus worldwide with a death toll of 80.  The vast majority of those cases (2,744) are in China, with a small number of confirmed cases reported around the globe including five in the United States.  The virus manifests as a pneumonia-like illness resistant to standard treatments, and is believed to have originated in the city of Wuhan located in central China.  Chinese authorities have restricted some travel in an attempt to limit spread of the illness, scientists are working diligently to develop treatments, but cases, and unfortunately, deaths are likely to rise until the outbreak is contained.

Markets despise uncertainty.  The recent flight to safety does not reflect “knowns” but rather “unknowns.”  With the deepest respect for those affected, the current known level of coronavirus cases and deaths will likely have no detectable impact on the economy and therefore should not have any detectable impact on the markets.  The markets are responding and pricing for the unmeasurable risk of what could happen if the outbreak is not contained.  The fear is that a global pandemic could severely limit travel around the world, reduce demand for fuel and disrupt global trade, all of which could impair the economy.  If that were to happen, we would anticipate a much greater downside response from risk assets, like global equities.

We do not have unique insights into the coronavirus outbreak specifically or how/if/when it will be contained, and how much damage (humanitarian and economic) it might inflict in the meantime.   That said, in the last 20 years, we have observed a number of global health concerns that we believe provide a useful historical template – not from a scientific or medical perspective (we’re not doctors), but from a news cycle and market perspective wherein anxiety spikes, but initial fears and reactions are overdone.  We recall the SARS outbreak in 2002-2003, the H1N1 virus in 2009, and ebolavirus, which spread to the United States in 2014.  Aside from those directly affected, most of us probably remember the headlines we read about these outbreaks at the time and little else.

Intermediate-to-longer term market implications will depend heavily on how the coronavirus situation unfolds in coming weeks and months.  We will continue to monitor developments and communicate our views.  In the meantime, keep in mind that 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