Coronavirus Commentary (as of Feb 27 2020)
In a matter of just six days, fears surrounding the spread of the Coronavirus have taken markets from their recent record heights through a fast and furious fall. As of today, 2/27/2020, the S&P 500, is heading toward its biggest weekly loss since the financial crisis of 2008.
The number of confirmed cases of COVID-19 continues to increase, and now spans more than forty countries, resulting in over 2,800 report deaths. Initial data from China placed the mortality rate near 4%, but that mortality rate has fallen to an estimate between 2-3%, and may edge lower due to the probable underreporting of COVID-19 infections, has compared to the more accurately tracked number of deaths.
Past historic disease outbreaks have impacted short-term markets, similarly. Looking back, we can see that the 2003 outbreak of SARS saw the S&P 500 index fall 14% over the subsequent two months. However, the S&P was up nearly 21% one year later. Other outbreaks including the Avian flu in 2006, the Swine flu in 2009, the Ebola virus in 2014, and the Zika epidemic in 2016, resulted in initial downturns between 5.5% and 7%. A year later, the markets had recovered by double digits in each case.
There is no denying that this current market reversal has been sharp, but such pullbacks are not uncommon given the recent gains and the long running bull market. In the cases above, the downturns were temporary and did not spawn a global recession nor deep market sell-off like we saw in 2008-2009. But we recognize that each outbreak is unique, and occurs under different economic backdrops.
The COVID-19 will continue to affect the world economy through both disrupted supply chain (the logistics of manufacturing goods in different places for the creation of a single product) and reduced demand as individuals limit their consumer activities such as purchases and travel, especially until a vaccine can be brought to market.
Hopes to get a vaccine to market are high, but doctors want expectations to be realistic for how quickly it can happen. Developing, testing and reviewing any potential vaccine is a long, complex and expensive endeavor that could take months or even years. By way of example, it took Merck nearly 5 years to develop and ship, to West Africa, a vaccine in response to the 2014 Ebola outbreak.
There is a host of companies, large and small, racing to bring a vaccine to market, and while some of those companies may be held in your portfolios, we are not altering allocations in attempts to find THE company that might most benefit, as it may be years before any one company can pinpoint the results to its bottom line. The good news is, the situation in China is improving as new confirmed and suspected cases have been decreasing, and warmer weather suggests that this shock could subside. Many believe that public health efforts, currently underway, are more likely to curtail the outbreak than any new drug on the near-term horizon.
The economic foundation with which the markets rest upon remains reasonably solid, around the world. The epidemic is a shock, but World Health Organization, while recognizing the risks, has not declared a pandemic, indicating that the risks remain contained.
The global economy came into the year with a healthy consumer, especially here in the US. Low interest rates and oil prices provide ongoing support to consumers and Central Banks stand ready to support the economy if its needed. Policy makers across the globe are working to maintain that trend. China has already lowered interest rates to help mitigate some of the effects which are slowing its economy, and there is consensus among U.S. economists that our own Federal Reserve is likely to lower interest rates twice between now and year-end.
Through the market close on Thursday, we’ve seen a swift and significant pull back in stock prices, but we’ve never chased market prices. Instead we’ll remain focused on the economic fundamental realities, our research toward quality corporations, and a belief in risk management through a long established eye toward asset allocation. We will continue to monitor this dynamic situation and keep you inform along the way.