Market Alert 3.2.2020

Coronavirus!  Coronavirus!  Coronavirus!

The coronavirus hit the stock market last week with vigor.   The U.S. stock market suffered a substantial drop last week over fears of the coronavirus.  The S&P 500 dropped 8.40% last week.

Then, in true fashion, the market rocketed upwards today, erasing more than half the drop from last week.  

Fear and algorithm driven funds drove the market down to point where it was “oversold”.  Meaning all the metrics used to measure stocks showed they were undervalued.  Then greed and the same algorithm driven funds pushed the market higher today.

It is not surprising fears of the coronavirus are so intense.  The media has been covering the coronavirus 24/7 non-stop.  It’s dominating the news and business channels.  According to the World Health Organization, in the United States alone for the 2019-2020 flu season, there have been at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths.  Imagine if everyone with an internet connection followed the spread of this annual flu, case by case, hour by hour.

It’s important to understand some basic facts:

• the mortality rate of the coronavirus is 1.4%.  That means that out of every thousand people infected, 14 will die.  The mortality rate for the flu is 1%.  However, many experts believe the mortality rate of the coronavirus is lower – much closer to the rate of the flu – because there are likely many cases that are not reported because the illness was mild, or patients had no symptoms at all.  
• over the 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 dropped by 12.8%.  During the Zika virus back in 2015 and 2016, the market dropped by 12.9%.  There are other examples, but they all passed, and the market recovered and hit new highs.
• the growth in the number of cases is slowing.
• the deaths from coronavirus in the State of Washington were individuals living in assisted living facilities.  It is important to look at the demographics of the fatalities.  
• a vaccine will be in testing in a few weeks.
• the virus will spread around the world, but as is the case in China, it subsides just like the seasonal flu.

The U.S. is relatively insulated from the effects of the coronavirus with a fantastic healthcare system.  The U.S. started the year with solid economic data and so far, nothing has changed.  Most of the impact of the coronavirus will not hit the U.S. economy until the second quarter.  

Capital goods exports to China along with imports from China will be depressed given the struggles to re-open factories.  Most Chinese factories are still only operating at about 50-60% capacity.  Shipping giant Maersk has already cancelled more than 50 trips to and from Asia.  With China being home to seven of the world’s busiest container ports there is bound to be some impact.  Inventories in the U.S. will be depleted more rapidly, but once the virus subsides, expect faster accumulation of inventories in the second half of the year.

Revenues and earnings from companies that are highly exposed to China will be affected.  China being shut down for a month will have a global impact.  But lower earnings in the first half of the year should be made up by a strong rebound in the second half of the year with payback from lost months  Demand remains strong and there has been no visible impact yet on the job market as shown by initial unemployment claims.  Supply disruption is an issue. There will be likely be weakness in earnings from the disruption, but the weakness is temporary.

Many companies had already begun shifting their supply chains from China because of the Trump tariffs.  If they were not considering it before they will be now as they realize the importance of diversification.  Expect this trend to accelerate moving forward.

The U.S. consumer is on solid footing.  Consumer spending accounts for the largest part of the U.S. economy.  Like all viruses over the past decades that have dissipated, the coronavirus will be no different.  

Last week and then today are examples of why it is important to stay invested.

Please let me know if you have any questions.