Situation Desk: February 27, 2020
Situation Desk: February 27, 2020

Situation Desk: February 27, 2020



William M. Giffin
William M. Giffin
Chief Executive Officer
Executive Board Member

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Kevin Rice
Kevin Rice
Senior Investment Strategist
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Situation Desk: February 27, 2020

Situation Desk – The Spread of the Coronavirus to the Markets

The Spread of the Coronavirus to the Markets

Turn on the computer or the TV, and you can’t avoid the news delivering a steady stream of concerning updates about the coronavirus turning into a pandemic.

Hope of successfully containing the virus deteriorated significantly last weekend with news of fresh outbreaks outside of China. The rapid expansion of infections across multiple continents has caused an 11% sell-off in the S&P 500 and the 10-year Treasury yield to move to an all time low. It may not be determined for some time if the coronavirus is going to be a temporary disruption to growth or the cause of a deeper downturn.

We have listened to several calls with global health experts about the virus, and their opinions vary on how the virus will play out. However, they all recommend referencing the SARS outbreak in 2003 to gauge the potential impact of the coronavirus.

We agree that looking at SARS is a starting point, but there are differences between the 2003 outbreak and today’s outbreak, particularly as we look at the current economy.

  • Since 2003, China has become a bigger part of the global economy. According to the International Monetary Fund (IMF), China accounted for 4.3% of global gross domestic profit (GDP) in 2003 and accounts for 16.3% today.
  • Today supply chains are more complex and globally integrated than when SARS hit.
  • While SARS had little impact on economic activity in Europe, the recent outbreak of cases in Italy could impact an already weakening European economy. With China being a key import destination, a shortfall of Chinese demand could cause further weakening of the European economy.

New information arrives daily and the full extent of the virus’ implications are still unpredictable at this point. In today’s commentary, we will provide an update on various indicators we are monitoring to assess the impact of the coronavirus, but first we will review the performance of various indices that we track.

Market Performance

Exhibit 1

On February 19, many stock market indices reached new highs and were trading as if the coronavirus epidemic had already been confined. After new data came out over the weekend indicating that the virus had spread outside of China, equity markets fell and fixed income markets rose. Looking at Exhibit 1, it is important to note that indices are still positive on a six-month and 12-month basis, and that over the past month fixed income has provided principal protection in the recent equity market drawdown.

Consumer Confidence

Consumer confidence numbers that were released from the Conference Board on February 25 indicated that consumers were still confident in the economy in January. With the unemployment rate at a 50-year low, we believe that the labor market should continue to support confidence in the short-term and, as a result, consumers will continue to drive growth and prevent the economy from slowing in 2020. The survey was completed in early February, so the further spread of the coronavirus was not reflected in the results.

Our View We will continue to monitor consumer confidence closely. The consumer represents 70% of the economy. It will certainly be tough for confidence levels to remain at January levels if we continue to see the virus spread globally. This will cause an obvious negative impact to the consumer and thus the economy.

Corporate Earnings

So far, 37% of the S&P 500 companies that have reported Q4 2019 earnings have cited coronavirus in some form during their earnings call. Many companies have said in their calls that it’s still too early to assess the effects of the virus on their earnings, but some are beginning to dial back expectations. Since the beginning of the year earnings estimates for the S&P 500 continue to be revised down.

Our View Corporate earnings will be critical to monitor, because as we mentioned in our last quarterly commentary, earnings growth will be necessary to justify further equity market gains based on where valuations were at the end of last quarter. As more companies report earnings, we believe companies that are highly exposed to China will continue to have their earnings impacted. Analysts are currently expecting that earnings will rebound in the second half of the year if the virus is contained soon.

Federal Reserve

Fed officials have said that it is too soon to determine whether any virus fallout will force the kind of material reassessment of the economy that would be needed to resume rate cuts. Investors have been placing growing bets on rate cuts later this year in interest-rate futures markets. As of February 26, futures markets expect the Fed to cut rates at least once by June (81%) and again by December (78%).

Our View We believe that it is necessary to monitor the Fed because they have the tools necessary to stimulate growth in the economy if it were to slow because of the virus. However, the Fed has never cut rates to address disruptions from an epidemic. If the virus causes factories to close and supply chains to be disrupted, lower interest rates will likely not have an immediate effect.

Global Supply Chain

Today supply chains are more complex and globally integrated than when SARS hit. According to Dun and Bradstreet, 94% of the Fortune 1000 companies are seeing a coronavirus supply chain disruption. Recently companies have warned that they might not be able to produce and ship products on schedule because they are lacking parts.

Our View The U.S. sources a substantial share of production inputs from China, corresponding to about 1.7% of U.S. GDP. The Organization for Economic Co-operation and Development (OECD) suggests that China is the single largest international provider of production inputs, followed by Canada and Mexico. Any disruption could greatly impact the global supply chain and have a material effect on U.S. growth. According to Goldman Sachs, no U.S. firm has reported any reduction in production in the U.S. due to supply chain disruptions thus far, and most companies in many sectors have enough inventory to continue production as normal for the remainder of the quarter. If the coronavirus outbreak persists, though, they believe that major production disruptions will likely occur. On a positive note, we are seeing more and more Chinese companies back in production – still not at full capacity, but at least moving in the right direction.

Economic Outlook

In our view, the economic environment that has boosted the stock market over the past year remains healthy with the Federal Reserve being accommodative, corporations reaping the rewards of lower tax rates, and investor confidence still backed by a 50-year unemployment low. Markets do not take well to uncertainty, and, given the ongoing uncertainty around the effectiveness and timelines of the virus containment efforts, it is unlikely market anxiety will subside quickly.

In times like these we still believe in holding a diversified portfolio and remaining invested in the market for the long run. As the saying goes, stay the course. You have heard this before from us, but this mindset has held up in events like this in the past. There is reason for concern, but the worst thing anybody can do is panic.

We will continue to monitor the virus outbreak and keep you updated. In the meantime, if you have any questions or concerns, please do not hesitate to reach out to your wealth advisor.


Tags:  Consumer Confidence, Coronavirus, Corporate Earnings, Economic Outlook, February 2020, Federal Reserve, Global Supply Chain, Market Performance , Market Update, TC on the Markets

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.