As of this writing, since February 20, the S&P 500 has fallen 12 percent and the yield on the 10-year US Treasury has fallen 30 basis points or 23 percent, mostly on fears surrounding the Coronavirus contagion, a respiratory illness first identified in China that is now present in over 40 countries.
While the spread of the disease has been rapid, primarily due to global travel and a lack of factual information, it is important to separate fact from fiction, especially when reviewing the potential impact on the markets and an investor’s portfolio.
Many health organizations have used the term “pandemic”. It is important to note that pandemic simply means global illness, not that the illness infects everyone or that it is fatal. As of February 27, there were approximately 82,000 cases globally, and the current mortality rate of the virus appears to be about 3 percent, depending upon patient health prior to infection and how quickly the patient seeks treatment.
Coronavirus can cause pneumonia and other respiratory difficulties. As this is viral pneumonia, antibiotics do not work, but that does not mean there are no treatments. Approximately 35,000 people who contracted the disease have now made full recoveries and the vast majority of the 82,000 are receiving treatment and improving.
The economic impact of this virus will not be known for some time. However, current estimates suggest that the global economy could be impacted by over $1 trillion, or approximately 1.2 percent of total global GDP of $85 trillion.
The previous projections for 2020 GDP growth were 1.4 percent for the major developed markets or 2.6 percent for the G-20 countries. A 1.2 percent impact from Coronavirus could suggest that global growth will be fairly flat in 2020 instead. Currently it is expected the largest impacts will be felt in Asia, where approximately 98 percent of the Coronavirus cases are located.
The projected 2020 U.S. GDP was previously 2 percent, and the impact from Coronavirus is projected to be less than 0.25 percent.
The 12 percent decline in the S&P 500 and pressure on U.S. Treasuries over last 5 days suggests the market is still grappling with uncertainty surrounding the virus thus far. As with all cases of major uncertainty, the reaction seems to be immediate panic. We do not expect that panic to last once there is more clarity about the trajectory of the disease and impacts to company supply chains and sales.
The majority of the impact outside of Asia is expected to be felt through reduced ability to travel as well as impacts to product pipeline and supply chains for manufacturing companies. This will likely impact Technology, Energy, Industrials, Materials, and Consumer Discretionary companies more than other sectors. Typically, defensive sectors should do quite a bit better under these situations.
However, so far during this downturn, all sectors have been impacted almost equally. Over the past week the three worst performing market sectors Energy, Technology, and Financials have declined on average 15.9 percent. The three best performers were Utilities, Health Care, and Communication Services, which declined 12 percent. While the defensive sectors are performing better, the similarity in declines demonstrates the market reaction to this health scare has been more emotional than financial.
We believe it is likely these effects will ultimately reverse as the markets gain clarity and the course of the infections plateau, but there can be no certainty of how long that process might take.
We recognize that the concern for investors is real as every news channel maintains 24-hour coverage of the disease and the red numbers on the market tickers continue to decline. However, we urge all investors to maintain a focus on their long-term portfolio objectives and investment strategy. We have had more significant declines in recent years – 19 percent in 2011, 20 percent in late 2018 – and the market has recovered in all cases.
It may also be that recent events will offer opportunities for portfolio management adjustments. All of us at Miles Capital are monitoring events closely and remain focused on the best interests of our clients in the short- and long-term.