Our Thoughts on Coronavirus-Related Market Volatility

We’ve been getting a lot of questions from clients regarding the impact of coronavirus’s spread on the stock markets, and wanted to reach out and provide our take on the situation.

First, let’s step back and make a very clear distinction between the two interconnected aspects of coronavirus that we will address. One is the human consequences for each person who is affected by the virus. That has already been dearly felt, particularly in Wuhan, China where the virus originated. However, we are not epidemiologists, and we only know as much as all of you do based on what has been widely reported. We are better equipped to discuss the impact of coronavirus on the world markets based on what we’ve seen during past outbreaks.

The biggest economic impact has been seen in China, where a number of cities are under lockdown quarantine, and the government has restricted business and travel. This should cause China’s manufacturing and consumer spending to slow considerably. Developing Asian markets are common destinations for Chinese tourism, and they should see a slowing as well. These economic indications have translated into a major pullback in Chinese and developing Asian markets, as seen below in this graph from our friends at American Funds.

The US has experienced some ripple effects due to companies that do business with China and source materials from the region. Starbucks has closed half of its Chinese stores, most US airlines are cancelling flights to China, and companies that manufacture in China, like Apple, may soon run out of their reserve product. Based on those fears, the US stock market was down about 2% from January 17th (American Funds).

Looking to past outbreaks, in the short-term we have typically seen a “V-shaped” market impact – a nosedive as an illness spreads, following by a “relief rally” afterward (Blackrock). However, investors are seeking a strong indication of containment before the upward slope, and so far, we haven’t seen that. Yesterday and today’s volatility reflects the realization that the virus isn’t contained as we previously thought. We continue to believe that with countries with meaningful outbreaks can reach that point of containment, the long-term market impacts will be as benign as those of previous outbreaks. Looking at worldwide stock market performance through these outbreaks as seen below, we can see that each has a relatively small impact overall – even Swine flu, or H1N1, occurred during the bottom of the 2009 crash (American Funds).

SARS and avian flu are two previous outbreaks that were swiftly contained. However, this was possible in part because those infected became quickly, severely ill. Coronavirus seems so far to kill less than 2% of infected people, far lower than SARS and avian flu, but because it only causes flu-like symptoms, it is easy to slip under the radar and spread more rapidly. This explains why containment is much harder to achieve, and as a result of this difference, the length of the V may be longer (The Atlantic).

The stock market ultimately represents our beliefs of what things are worth and will be worth in the future, and these beliefs are shaped by everything from current events to economic indicators. So, when we look at what coronavirus has already done to the markets and what the general outlook is, this is influenced by both the current state of the virus and what investors think will happen. Our role as your advisor is to try to interpret the impact of these real-world events on your stock portfolio.

Over the last 14 months, we have been incrementally lowering the risk within our models. Even with this recent volatility, the economy and the markets have performed very well during this timeframe. We are very comfortable with our allocations and recommend that we ride through this latest volatility. With that said, we are continuing to monitor this situation and will keep you in the loop on any changes we feel need to be made.

We greatly appreciate the trust you have placed in us. Please do not hesitate to reach out with any questions.