We have been closely monitoring the outbreak of the coronavirus and hope that health care officials can minimize the human toll that this type of event can bring. At the same time, we are also sensitive to the potential market and economic consequences. Friday’s (January 31) losses in the U.S. equity markets and Monday’s (February 3) sharp decline in Chinese stocks are reminders of the potential financial consequences of this epidemic. China is the world’s most populous country and its second largest economy; from a global tourism and trade perspective, it has to some degree been shut down and sealed off from the rest of the world.
The current confirmed infection count is in excess of 17,300 people (including 11 in the U.S.) and 362 deaths, including the first outside of China in the Philippines. To provide some historical context, the number of deaths from the coronavirus has now exceeded that of the 2003 SARS epidemic, which resulted in 349 deaths over a nine-month period. For further perspective, the CDC (Center for Disease Control and Prevention) provided the following statistics regarding the 2018-19 season of Influenza: an estimated 35.5 million people getting sick with influenza, 16.5 million people going to a health care provider for their illness, 490,600 hospitalizations and 34,200 deaths. While the coronavirus is serious, it is not without precedent.
Looking at epidemics from the relatively recent past (1995 onward), history suggests that market impacts tend to be transitory and any weakness tends to coincide with peak in the growth rate of reported cases, which in our experience also tends to be the peak of media hysteria. After the avian flu, SARS, MERS, H1N1 and most recent Ebola outbreak, the U.S. stock market was higher six months later in each case.
There are legitimate reasons to be cautious and concerned. China’s economy was already slowing, and it now represents a larger percentage of the global economy than it did during previous epidemics. There is also some evidence that medical personnel in Wuhan were dealing with a new and unique virus in early December, but the information was not made public until later.
Counterbalancing these concerns are restrictions on global travel, the construction of a hospital to treat patients in Wuhan in just 10 days and the fact that Chinese authorities were quick to effectively quarantine some 100 million people in Wuhan and the surrounding areas. From an economic and market perspective, The People’s Bank of China (PBOC) had already been easing fiscal and monetary conditions in response to slowing domestic growth. On Monday (February 3), the central bank further cut rates by 10 basis points and injected liquidity into the financial system. Global supply chain managers have already been dealing with the trade conflict between China and the U.S. and took steps in response prior to the coronavirus outbreak.
In closing, recent developments concerning the coronavirus bear close monitoring and will likely result in more volatility in the short term. However, based on current information, we would not change long-term investment plans or asset allocation based on the recent coronavirus outbreak.
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