Coronavirus fears markedly intensified this week as the number of cases outside of China increased, namely in Italy, South Korea and Iran. On Wednesday, U.S. health officials reported the first community transmission (meaning not travel related) of the virus, further stoking fears. Now, what was a “China-centric” problem has spread to other parts of the world and that’s elevating uncertainty. Major stock indexes in the U.S. fell sharply in response, on pace for their worst week since the financial crisis more than a decade ago. Global indices haven’t fared much better.
Markets are panicky right now (we think it’s a bit overdone), which is why it’s time to step back and pay closer attention to the bigger picture, and not the headlines flashing across television screens and news feeds.
The evolution of this virus is unclear, even to medical experts — and that uncertainty is primarily driving investor fears. But before we provide our outlook, we want to give a little background on what we know so far. Over the past month there have been 82,000 cases globally, a small fraction of the Chinese and global population. Importantly, new cases are slowing in China and there have been well over 30,000 full recoveries compared to 2,800 deaths, according to CDC data. And, over the past several days, daily recoveries have exceeded new cases. That’s driven the number of active cases (currently 46,000) lower over the past few days.
Still, it’s clear that efforts to contain the virus disrupted economic activity around the world. Parts of China have been shut down to prevent contamination from spreading. Tourism is taking a hit (see Japan) because people are holding back on travel plans. Companies are warning that earnings will be affected as supply chains are disrupted and consumers pare back spending in some sectors. Without a doubt, there is tremendous uncertainty regarding the virus, from both the investor and medical communities. Particularly, there’s concern that there will be more shutdowns in other parts of the world to contain the virus.
When an unpredictable shock like this strikes fear into markets we take a closer look at the underlying economic fundamentals. How healthy was the economy before all this happened? And, can the economy withstand an unforeseen shock? We think the global economy was healthy before this and has been stuffed full of stimulus which has historically helped steady it during adverse events.
In contrast to the tightening we saw for much of 2017-2018, central banks around the world spent 2019 easing policies to bolster their respective economies. The U.S. and global economies are now full of stimulus, which historically has helped build resiliency to negative events. That doesn’t mean stimulus measures are a guaranteed remedy, but ample liquidity has a solid track record of spurring growth and stemming shocks. Just look to the U.S. housing sector, which has been building momentum for several months. This week, powered by low mortgage rates, new home sales rose to 764,000, which is the highest tally since 2007. Those three rate cuts in 2019 are beginning to tangibly affect the economy. But there’s more good news.
Consumer confidence earlier in the week remained elevated. Consumer balance sheets are strong — debt-to-equity levels are near where they were in the early 80s and the cost of that debt is as low as it’s been in 30 years. The job market remains in good shape. The banking system is healthy.
Around the world, we saw a pick-up in leading economic indicators as trade fears faded. Manufacturing, which had been in retreat throughout 2019 due to trade, was showing signs of stabilization around the world.
That was the story before the coronavirus outbreak wrested control of the global narrative. But policymakers around the world are fighting back and have bolstered their economies to weather a storm like the one we’re experiencing now. This week, for example, Congress got to work building a funding plan to fight the coronavirus. In Hong Kong, residents who are 18 and older will receive $1,300 to spend. Germany is considering its own stimulus package to counteract the coronavirus impact. Global leaders are prepared to roll out further supports if the virus continues to weigh on growth.
Long story short, the global economy has taken its medicine and built up resistance to the virus.
Ultimately, we want to remind that the best way to deal with uncertainties is through diversification and adherence to a well-constructed financial plan that takes market dislocations like these into account. Stocks are still truly for intermediate- to long-term financial goals. No one should need to sell equities during the time period in which this virus could impact markets and economies. And no one should panic out of equities as a strategy. The key to building wealth is to see past these fears and not panic. As we demonstrated recently, those who don’t fall prey to hysteria tend to have far better long-term investing results.
This is precisely why it’s important to work with an advisor who can objectively set your asset allocation and diversify your portfolio. They’re putting your entire financial plan (not just investments) through stress tests, just like the big financial institutions, to ensure your goals remain on track in good times and the most challenging times. No one can predict something like the coronavirus, but it is possible to build a plan that’s resilient to any shocks like it. This is where the expertise of an advisor, who knows you and your entire financial picture, really shines. Therefore, as this situation continues to unfold, one of the best things you can do is…nothing at all.
Market turbulence is going happen, but you’re ready for weeks like these. You’ve built a financial plan. Now is the time to trust it.