By: Scott Thomas
Following more volatility in the markets centered around the Coronavirus we wanted to reconnect and give our thoughts. It has a been a few weeks since our original commentary. As financial advisors we need to understand and analyze the economic impact of any event but don’t want to downplay the human tragedy of the virus that the world is experiencing.
The virus originated in China and has spread to other countries, primarily South Korea, Italy and Iran. The most recent data that we’ve seen reports there are 80,088 confirmed cases and 2,699 deaths. While we expect these numbers will continue to increase due to new cases and cases not yet reported, the increase looks to be slowing. According to Worldometer, total active cases peaked a week ago at 58,747 and has been declining since. Within the United States borders we have been relatively insulated from the virus with those affected being quarantined. Though it appears the first possible community transmission of the virus in the US impacted a Northern California patient. We have one of the best health systems in the world and there are some promising vaccines that are being expedited through the development phases.
The economic impact is global in nature, in that supply chains are being disrupted and commerce is slowing down. With the coronavirus spreading outside of China it suggests that the earnings recovery that we were anticipating outside the U.S. this year may be delayed. Originally, we had expected an earnings impact for a quarter or two but that could be extended into the latter half of 2020. Transportation companies, global retail brands and technology companies, amongst others, have made it clear that their businesses are slowing in a material way. The United States economy started the year in a strong position, with steady growth, low unemployment and we don’t see that changing meaningfully. For some international economies we may see 0.50% to as much as a 1% decline in gross domestic production over the next few quarters but anticipate that may be followed by a pickup as companies play catch up on any lost production. Companies that are over leveraged might have a difficult time recovering.
Has GBB recently made any changes to the investment portfolios?
- We have not sold investments solely due to the virus. We continue to take a medium to long term approach while allowing economic and company fundamentals to drive our decisions.
- For newer clients or individuals where we are dollar cost averaging into the markets, we have expediated some of the those buy trades to take advantage of the selloff.
- In December we slightly reduced our equity allocation due to a strong run-up in the markets. We believe that the U.S. equity market was getting ahead of itself and slightly reduced our long only US stock exposure.
- We continue and will remain diversified within the portfolios. As the global equity markets have backed up, high quality fixed income has held up well and in most cases have appreciated . Though with the 10-year bond yield hitting an all-time low this week, bonds do not appear to be a great answer for the medium-long term either.
Finally, we think it is helpful to look at past epidemics and how the US markets represented by the S&P 500 index reacted. During the peak of the 2003 SARS virus the index fell by 12.8% and during the 2016 Zika virus the index retraced by 12.9%. If we fast forwarded a year from the start of the epidemics, the markets had recovered and were positive by 20.8% during the SARS outbreak and gained 17.5% following the Zika outbreak*.
We truly appreciate your confidence in GBB and if you have any questions, please don’t hesitate to reach out to an advisor at (916) 924-7527 or complete our contact form.
Mike Genovese and Scott Thomas
Co-Chief Investment Officers
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
*Source: First Trust: https://www.ftportfolios.com/