Coronavirus vs. The Markets
Dear Clients & Friends,
It seems like all we talk about is China and the Trump impeachment trials these days. As if we haven’t heard enough about the China Phase 1 trade deal, now we are all worried about the coronavirus. I want to briefly touch on this topic since the market sold off sharply a few days ago due to fear of this new disease. Although we have seen some market recovery since then, the virus is spreading at a rate of 20% per day - so let’s get into it.
Let’s talk about the virus and its effects on the investment markets. For the sake of comparison, we will be using the 2002-2003 outbreak of SARS (Severe Acute Respiratory Syndrome), which is also caused by a coronavirus. As of Wednesday, January 29th, China has confirmed 5,974 cases of the new coronavirus. This number exceeds the 5,327 cases of SARS documented in China during the 2002-2003 outbreak. I certainly do not want to sound inhumane, but within the context of Wealth Management, I’m going to focus more on the economic and market implications of this virus rather than on the human cost. Fortunately, from both a human and a financial perspective, this virus is far less fatal than SARS. Experts claim that the fatality rate of the new virus is 3%, which is far less than the fatality rates of SARS and other pandemic diseases.
With the 2002-2003 outbreak of SARS, there was essentially no impact on the US economy. We saw a sharp but temporary pullback in the investment markets, as we usually do with a hot mainstream news topic. In regard to the new coronavirus, governments and corporations are taking swift action to protect the community: airlines have canceled flights, corporations such as Starbucks and McDonald’s have closed until further notice, 70,000 Chinese movie theaters have been closed, etc. Additionally, the Chinese government has pledged $8 billion to isolate and battle the virus. Due to these actions, it certainly appears that the economic impact could exceed what we witnessed during SARS. The South China Morning Post estimates that China could experience up to a 1% loss of GDP growth. This is a lot - but it’s not catastrophic. In fact, I’d be more worried about a stock market drop caused by mainstream media fear-mongering and social media clickbait madness.
The market is frothy right now, and it takes very little to spook an already anxious market. While the prospects of further trade negotiations with China are likely, many are hopeful for a further increase in the stock market (a conversation for another day). On the other hand, we are seeing bearish metrics from corporate insiders, a low VIX, and a lot of uncertainty within the political landscape. This is a recipe for a short-term dip; and again, it takes very little to spook an already anxious market.
Keep in mind that most of our clients’ portfolios hold less risk (% of stocks) than they traditionally hold; in some cases, there is dramatically less. Thus, a sudden and severe market correction is not something we are worried about. We are also very pleased that, in most cases, clients outperformed their appropriate risk-based benchmark again last year, even despite the assumption of less risk than other comparable portfolios. The point is that we feel well-positioned to endure, and possibly profit from, a short-term dip. We are also comfortable with our allocation in light of a frothy market and decelerating economy (p.s.- “decelerating” doesn’t mean shrinking, it means that growth is slowing).
To summarize: at this juncture, we anticipate some, but not a great deal of economic impact resulting from the coronavirus. We remain diligent, ready to change course if we see fit. We are comfortable with our short and mid-term asset allocation and risk policy. We remain cautious with regard to the potential for a looming recession. We are very pleased with clients’ portfolio performance. Most importantly, we share our sympathies with those who have been affected by the coronavirus and hope that this virus can be contained quickly and that more deaths can be prevented.
We wish everyone a healthy weekend.
-The MORWM Crew
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
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