Coronavirus – Trying to Know the Unknown

Coronavirus – Trying to Know the Unknown

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The unknown impacts of the coronavirus are taking a toll on the market, as no one knows what the true impact will ultimately be.  Traders continue to sell the latest headlines increasing the volatility in the market and pushing stock prices further down.  Over the weekend, the spread of the virus in the U.S. continued to fuel concerns. Unrelated, Saudi Arabia declared it would begin to increase oil production which sent oil prices plummeting and added to the worries of an already skittish market. 

What we do know is that governments are in a precarious position of balancing the humanitarian impact versus the economic impact of the virus.  Candidly, the coronavirus poses only a slight risk to 85% of the world’s population (being those individuals aged 70 and younger with no preexisting health conditions), which also constitutes the majority of the global workforce. So, if governments were to keep a hands-off approach, we would imagine that the actual economic impact of the virus would be limited.

However, governments will (and we believe should) intervene to reduce the spread of the virus.  Governments around the world will take the steps they deem necessary to protect their citizens.  This intervention will no doubt cause an economic recession as supply chains are disrupted and the movement of goods and people is restricted, both domestically and globally. 

Currently in the U.S., we have only started to discover the number of cases present due to the delay in testing capabilities.  As testing ramps up this week, we expect the number of cases, and subsequently the number of confirmed fatalities from the virus to increase.  What we do not know is what level of intervention the U.S. government will take to decrease the humanitarian impact of the coronavirus.  Outside of Italy and South Korea, the larger outbreaks of the virus have happened in countries (China and Iran) where civil liberties are already curtailed.  The intervention of a country that is founded upon unalienable rights to freedom, in our opinion, will have to be more delicate and as of now are set at the state and local levels.

What the intervention and the subsequent market response will look like has yet to be determined.  We expect the impacts of the virus to be short-lived as summer arrives and we exit the flu season.  However, we also anticipate that a shallow and short-lived recession will occur as supply chain disruption and lower consumer spending has an impact on company earnings.  While they can be painful at the moment, these recessions are normal and part of the natural business cycle. 

When we don’t know the outcome of an event, it’s easy to feel anxious.  What is important though is to remember that these events happen and eventually end up being a bump in the long-term road to financial security.  What is critical is that you stick to the road map that has been laid out by your adviser and don’t detour in panic. 

-The Investment Committee