As you’ve already heard and read, the coronavirus is traveling the world. There’s no question it’s a human tragedy, with growing confirmed deaths and reported cases across numerous continents.
The illness is causing panic across the globe and because I am not an epidemiologist, I won’t offer whether this panic is warranted. However, when a global virus like this occurs, fear tends to spread faster than the virus itself. At this point, it’s simply too hard to handicap the range of outcomes for the coronavirus. There are too many uncertainties and the virus is an enigma without a proven cure at this stage.
In terms of the investment impact, the market (S&P 500 Index) has dropped over 10% from its recent highs. The market is now concluding that the coronavirus epidemic will inflict greater damage to the global economy. Though history can be a useful guidepost for understanding the ultimate impact of health epidemics on the global economy and markets, China’s importance on the global supply chain is far greater than past epidemics.
More companies are confirming that the coronavirus is negatively impacting the supply of goods from China and the large demand drop-off among Chinese consumers due to the country’s lockdown. At this point, it’s impossible to quantify the impact that the coronavirus will have on the global economy and how long it will linger. This is largely due to the fact that it’s impossible to assess how far and wide the panic will spread because of the virus.
While I remain optimistic that the spread of the coronavirus will ultimately be contained with little or no long-term damage to the global economy, the near-term noise and news flow is still uncertain. Importantly, as the first wave of U.S. contagion headlines hit, market volatility will increase like today. From an investing standpoint, a key factor is if the coronavirus fear starts to weaken the current strength and resilience of the U.S. consumer which is powerful engine of the global economy.
For historical context, see the table below which shows stock market (S&P 500) performance during and after significant negative world events since the 1940s. The table highlights that the market, on average, recovered in the months and years after the events.
The good news, in my view, is that the markets and economy will eventually mean revert and get better. The not-so-good news is, like the coronavirus, there’s no defined timetable for it to occur.
David Hone, CFA