Below we provide an update to our Special Edition Investment
e.Perspective published earlier this month, The Coronavirus and the Global Economy.

Efforts to contain the new coronavirus have failed. The coronavirus, and the disease it causes known as Covid-19, is thought to have started in a seafood and live animal market in Wuhan City in the Hubei Province, China. The disease spread quickly across China and then spilled abroad; it has now been diagnosed in patients in every continent except Antarctica. To date, the most severe focal points outside of China have developed in South Korea, Japan, Iran, Italy, Hong Kong and on cruise ships. The new coronavirus has also been diagnosed in the US and the CDC expects it to continue to spread.

The disease is very contagious from person to person and is more severe than the seasonal flu. Some estimates place the mortality rate north of 2% (approximately 20 times deadlier than the seasonal flu) and has been found to be particularly severe in older patients. According to the CDC, at this time there is no vaccine to protect against Covid-19 and no medications approved to treat it.

Policymakers across the globe have implemented stringent measures in an effort to limit the spread of the new coronavirus. As can be expected, these measures are having a noticeable impact on economic activity. Schools are cancelling classes and travel is being restricted. Around the globe, authorities have implemented quarantines at various levels including cruise ships, cities and regions.

The economic impact is difficult to estimate as this situation is rapidly changing day-by-day. In China, where the disease began, economic activity has decreased dramatically in some regions. Although this hasn’t shown up in the national GDP numbers yet, we deduce as much from statistics such as depressed levels of energy consumption, decreased average road congestion and the growing number of containers waiting to be offloaded at ports. Initial estimates suggested the impact on China’s GDP would be around 1.5%, but the longer the quarantines remain in effect, the more likely the impact will be larger.

The corporate sector started to express concern in the US and abroad, particularly due to the uncertainty created around integrated global supply chains. For example, Apple recently announced its business will likely be impacted due to the strain on its supply chain in addition to reduced demand in China. Also, in light of the growing number of quarantines around the world, industries such as airlines and hospitality are expected to be hit particularly hard. In response, Wall Street analysts expect downward revisions to corporate earnings.

Markets reacted with vigor in recent days, with stock market declines around the world. In the US, the S&P 500 declined 12% from its peak just last week on February 19. The 10 Year US Treasury Yield declined below 1.3%, inverting the yield curve once again. Authorities in China responded by adding liquidity and announcing fiscal stimulus measures. In the US, we expect the Federal Reserve will likely cut rates at the March meeting, if not sooner.

As is usual in times of stress in the markets, it’s important to keep an eye on the big picture. Despite the sharp decline in the stock market in recent days, the market is still 18% higher than it was at year-end 2018. Also, assets that may have lagged the S&P 500 last year, such as US Treasury bonds, are now providing ballast. Diversification is providing a helping hand.

This is a very fluid situation, with new cases of the coronavirus being reported every day around the world. This week, the number of cases reported in the rest of the world surpassed the number reported in China. It’s too early to predict the total impact to the global economy or how long it will last. Many questions remain regarding the disease as the world looks for ways to contain it. The human toll is being felt around the world, and the global economy is now feeling it too. We will continue to closely monitor this situation and will report periodically as needed.

The above commentary represents the opinions of the author as of 2.27.20 and are subject to change at any time due to market or economic conditions or other factors.The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Sources:
Bianco Research LLC
Strategas LLC
Bloomberg LP