FEBRUARY 24, 2020
We wrote this article in consideration of recent news and the recent drop in stock markets, notably today’s 3.4% sharp drop. First, we want to acknowledge our prevailing view remains that the global economy remains intact, with the most likely outcome being modest growth for 2020. Including today’s stock market decline, the S&P 500 is back to beginning of 2020 levels with highly valued tech stocks bearing the brunt of the decline. However, we would be remiss not to acknowledge the growing risk to the economy from the novel coronavirus, Covid-19.
There are a lot of questions that this novel virus raises, such as how severe the actual disease might be, what effects will it have on the economy, and how could it impact my portfolio?
Regarding the severity of the virus, a recent story from Bloomberg News1 investigated the seriousness of Covid-19. While they acknowledged it should be taken seriously, they clarify the disease is far less deadly to its related coronavirus, SARS. With SARS, the death rate was 1-in-10. Covid-19 is somewhere just below 1-in-50 and is likely be lowered as effective antiviral drugs are discovered and deployed to treat the most severe cases. Where it differs from SARS is its onset is closer to the common cold than the flu. It can begin without a fever and it resides and reproduces in the nose and the throat of the infected person. This boils down to it being more infectious, but far less deadly. Roughly 80% of those that get the virus experience a “mild” illness akin to the flu, 1 in 7 get pneumonia from the disease, and about 5% end up in critical condition. So, why is this having such an impact on the economy?
It is this increased infectious rate that is driving economic and market concerns. As the disease pops up in new global population centers, we will see more quarantines, more shutting down of factories, higher and extended sick leave, and more shutdowns of events like Venice’s Carnival. These business shutdowns, quarantines of workers, and travel cancellations all are contractionary to the economy in the short-term. As Apple Inc. announced last week, they are expecting a decline in their ability to produce iPhones to meet consumer demand off the back of semiconductor shortages. All of this is leading to a short-term contraction in the global economy, which should abate as “cold, flu and coronavirus” season comes to an end.
As for our investment portfolios, we create each for the long-term. As the economy and markets sort out the impact of the coronavirus, volatility should continue. Volatility comes with the territory when investing in stocks.
On the practical side, it provides opportunity for long-term investors. When the market provides good buying opportunities, we are prepared to pick up stocks at attractive valuations. If the stock market dives into correction territory, our bond portfolios will provide ballast that is necessary to ride out the storm and fund any short-term spending needs you may have.
As always, if you have any questions, please do not hesitate to contact us.