Going Viral
You’ve heard a lot about the coronavirus lately. This latest outbreak and an unexpected flare up in the Middle East gave markets a jolt to start 2020.
These shocks were enough to ruin most Wall Street strategists’ predictions for the year. A rotation into value stocks? A return of inflation? Pick up in global growth? These predictions now appear to be busted within the first 31 days of the new year. The strategists will recover; their predictions might not.
2019 also capped off a strong decade of performance. The world has come a long way in the last ten years. At the start of 2010, the world was struggling with the aftermath of the largest economic contraction since the Great Depression. The unemployment rate in the US was 9.9%. The Federal Reserve and other global central banks launched an unprecedented monetary intervention to combat deflation. Many feared the unintended consequences of such policies would result in a stunted economy, high inflation, or both.
What worked in January was a continuation of what worked for most of 2019. Large technology stocks led the market, supported by better-than-expected earnings. Investors rushed into bonds as the extent of the coronavirus became more frightening and uncertain. All told, large US stocks finished flat for the month, while the broader global index of stocks was down 1.1%.
The impact of the coronavirus was seen most directly in commodity markets where gold, a traditional safe haven in turbulence, gained 4.6%. Copper led industrial metals lower, falling 9.4% as China, the world’s manufacturing hub, deals with economically disruptive quarantines. Despite the threat of war with Iran, oil declined 15.6%, driving energy stocks down 11%.
Still dealing with the effects of tariffs, will manufacturing output be able to withstand a spreading pandemic? This is the question that is now driving the markets.
Amid the hysteria surrounding the coronavirus pandemic, it’s worth taking stock of both the positives and negatives at this juncture:
Glass Half Full
With 40% of companies in the S&P 500 reporting, earnings have exceeded expectations. Analysts were anticipating earnings to contract 0.7% in the 4th quarter. So far, companies have beat expectations, growing earnings at 1.7%.
Inflation remains low. Despite the risk of tariffs raising the price of consumer goods, inflation has remained modest as prices increased at a 1.8% in 2019.
Regardless of all the potential global issues to worry over, consumers continue to feel confident, spending at a healthy clip throughout the uncertainty.
The Federal Reserve signaled a high bar to hiking interest rates and indicated it would be ready to ease monetary policy if the economy weakens.
Glass Half Empty
Spreading pandemic. The concern is economic activity will slow down as people become more fearful. Can a widespread, but temporary, epidemic cause a recession? Ebola, SARs, Swine Flu, and Avian Flu all caused concern, but proved to be temporary setbacks for financial markets.
Weakening commodity prices. Falling copper prices are worrying, signaling lower industrial activity.
Elections have a history of charging the political climate, and the political noise in 2020 will be deafening.
Britain has finally left the EU after 47-years. What this ultimately means for the global economy is yet to be determined.
WHAT IT ALL MEANS
So far, there are about 360 deaths reported from the coronavirus and over 17,000 cases. To put that into perspective, there were 35.5 million cases of the flu in the US and 34,000 flu-related deaths in 2019, according to the CDC. Of course, the fear is largely about what is unknown about this new virus. The latest pandemic is spreading at a fast rate and grabbing international headlines. If history can be a guide, financial markets typically recover from global-health fears.
Uncertainties surround us, but we must carry on regardless of our worst fears. The same is true for your money. Apocalyptic thinking can run rampant in the financial markets. Fear is difficult to override when it’s your money on the line. Humans are wired to run before determining whether the rustling in the bushes is a hungry lion or a harmless deer. That instinct is not particularly useful when it comes to making sound financial decisions.
The markets are down a modest 3.5% from their highs. We should expect several 10% pullbacks in any given year. That means we should plan for volatility no matter how good or bad we feel about the current state of the world. Make sure your near-term objectives can be met with stable resources, but also keep long-term goals in focus. Good financial planning should always incorporate the uncertainty of life and the markets.
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