Recent volatility in financial markets related to the spread of the coronavirus is understandable given the tragic loss of human life and that the full economic implications are yet unknown and will continue to be so for some time.
Still, while markets react to the uncertainty surrounding the outbreak, we believe it important to remind investors to distinguish between such uncertainty-driven, temporary market reactions and the fundamentals that drive market performance in the long term. Yes, volatility is uncomfortable, but it also is normal — particularly during times of uncertainty.
While the coronavirus outbreak has greatly shocked global economic markets, containment efforts are beginning to show improvement, particularly in China, which was the epicenter. Containment measures have begun to ease in China, as the number of new coronavirus cases has slowed. Many companies that shuttered in February have begun to reopen and employees are beginning to return to work, while supply disruptions caused by factory shutdowns are slowly starting to ebb.
Despite Coronavirus Impacts, U.S. Economy Likely to Prove Resilient
It is likely the U.S. will see a rise in the number of coronavirus infections in the coming weeks. However, the fundamentals underlying the U.S. economy appear strong enough to shoulder the temporary shock to the system. Consumers are confident, employment is high, and inflation and interest rates are low — all of which are likely to bolster spending and investment.
Because of these strong fundamentals, we expect any impact on U.S. growth to be temporary, lasting no more than a quarter or two. While certain sectors assuredly will be hit hard by the coronavirus outbreak — including air transportation, arts and entertainment, food services, hospitality, manufacturing, recreation and retail — collectively these industries represent only about 25% of GDP in the U.S. As spread of infection slows and containment efforts improve, we expect growth to fully recover.
Risk Remains, But Recession Unlikely
That said, negative effects from the outbreak could deepen, especially if anxieties and fears alter consumer behavior and business operations. Even in such an event, the U.S. economy is likely to avoid recession, but a return to normal for economic activity will likely not occur until the end of the calendar year.
Considering the Federal Reserve’s recent surprise interest rate cut, the stock market should eventually shake off the effects of coronavirus uncertainty and reconnect with the economy’s broader, positive fundamentals. Still, an extended disruption in the financial markets remains a possible risk.
Volatility likely will remain elevated in the near term; though, for historical context, over previous viral outbreaks, the S&P 500 saw declines between 6% and 13% that lasted an average of 62 days before beginning to recover, averaging 23% in gains over the subsequent 12 months.
Portfolios Positioned to Weather Viral Impacts
As it stands, uncertainty remains, as it likely will be several weeks until a clearer picture emerges of the cumulative economic and human impacts from the coronavirus outbreak. In the meantime, we want to reassure clients that our late-cycle playbook has built resilient portfolios of durable, quality assets designed to weather events such as this outbreak.