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Capital market volatility persists on rising coronavirus fears

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Equities under pressure on rising coronavirus fears

The continued spread of the coronavirus that first emerged in Wuhan, China, has further rattled capital markets. Global stocks, particularly emerging market equities, have sold off sharply, while U.S. Treasuries, considered a safe haven in times of crisis, have risen in price and fallen in yield to levels not seen for nearly six months. Investors are increasingly concerned that the transmission of the virus within China and across the globe could have a durable and negative impact on global economic growth and, by extension, hamper corporate profit growth.

Markets under pressure

Due to the economic risks posed by the coronavirus, the uncertainty surrounding its transmission and fatality rate and the near-term economic impact of reduced consumer activity in China, equity prices have been under pressure ever since virus fears first emerged in mid-January.

Since January 17, emerging market equities, as represented by the iShares MSCI Emerging Markets ETF, have fallen more than 9 percent. Importantly, China is that index’s largest country constituent. China and Hong Kong-listed securities together represent one-third of the overall index.

Global growth concerns have also pressured oil and other commodities, due to the expectation of a decline in global travel and factory activity in China, with crude oil falling 12.7 percent. U.S. large-company stocks, as measured by the S&P 500 Index, while not immune to current events, have proven more resilient, and have fallen around 3 percent from their prior highs.

What we know about the virus

As of January 31, according to the Center for Systems Science and Engineering at Johns Hopkins University, there are more than 9,700 confirmed cases of the coronavirus and more than 200 fatalities.

While the virus appears to be spreading within China from its epicenter, Wuhan, at this point the virus has been more contained outside the mainland. Thus far, only 118 coronavirus cases have been confirmed outside China, and governments and global health authorities are attempting to contain the virus to the currently affected areas. The coronavirus’s failure to spread internationally is an extremely positive development, but if this changes that would constitute a considerable risk to global growth.

Risk to the current outlook

The virus is already having an impact on economic activity, with people staying home and spending less. Wuhan, a city more populous than New York, is at a virtual standstill. More than 45 million Chinese people are quarantined and 60 million face travel restrictions. Further, many international airlines have announced flight suspensions to China, reducing tourist traffic and disrupting general commerce.

China’s economy is much more consumer-focused today than it was in 2003, when a similar coronavirus known as severe acute respiratory syndrome (SARS) broke out. Today’s likely consumer spending slowdown may have more than a transitory impact. China is now the world’s second-largest economy and has tight economic links with the rest of Asia. There is a risk a slowdown could reverberate globally.

We observed a multi-speed global recovery as we began 2020, with emerging market economies exhibiting the strongest economic momentum of their global peers. While we continue to see this economic rebound in much of the data and indicators we assess, the data lags current events and doesn’t yet measure the coronavirus outbreak’s full impact. Because of the Chinese Lunar New Year holiday, key Chinese economic indicators covering the recent time period will not be released until March.

We are monitoring the rapidly evolving situation closely and will be certain to update you if it impacts our capital market views. We firmly believe that commitment to a disciplined financial plan can improve investment outcomes and help investors meet their personal goals. As always, we are happy to answer any questions about the situation and its risks to portfolios and we thank you for giving us your trust to manage your hard-earned capital.

Investment products and services are:
NOT A DEPOSIT • NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future performance. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

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Important Disclosures

Investment products and services are: 
NOT A DEPOSIT  •  NOT FDIC INSURED  •  MAY LOSE VALUE    NOT BANK GUARANTEED   NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Equal Housing  Lender Equal Housing Lender. Credit products are offered by U.S. Bank National Association and subject to normal credit approval. Deposit products offered by U.S. Bank National Association. Member FDIC.