Our market narrative remains intact
The outbreak of a coronavirus, a pneumonia-like virus similar to SARS (Severe Acute Respiratory Syndrome), has rattled investors this week. The situation is rapidly evolving – at the time of this writing reported cases of the virus have spread from the origin city of Wuhan, China to two confirmed cases in the U.S. and two in France. Our thoughts go out to the affected individuals and families. China is reporting over 900 cases including 26 fatalities.
News of the virus contributed to increased volatility in foreign emerging market equities and in global demand-sensitive commodities like crude oil and industrial metals earlier in the week. Concerns about its spread to the U.S. and Europe contributed to a further drop in equity prices today, including U.S. equities. U.S. treasury notes, considered a safe haven in times of crisis, rose in price to the highest levels seen since October.
In response to the outbreak, the Chinese government enacted strict travel restrictions in 12 cities including Wuhan, impacting 35 million people. The quarantine situation comes ahead of the high-traffic Lunar New Year holiday in China and is anticipated to significantly disrupt tourism and impact consumer spending. A further spread of the virus and the resulting steps taken by governments to control its spread could have a material effect on demand and potentially curtail 2020 economic growth.
While we continue to monitor this rapidly evolving situation closely, we maintain our constructive view on global growth prospects and global equities. The World Health Organization (WHO) has yet to declare an international public health emergency and governments have taken aggressive measures to combat the virus. While the U.S. Center for Disease Control (CDC) believes that the immediate risk to the U.S. public is low, it has mobilized an aggressive response and continues to screen travelers for any signs of infection. For now, we believe the global and domestic economic impact from the virus will prove transitory.
The 2002 – 2003 SARS outbreak, which also emerged from China, provides some historical perspective. Like the coronavirus, SARS spread through the air such as when an infected person coughs or sneezes. SARS rapidly proliferated worldwide, eventually infecting over eight thousand people and resulting in 774 deaths.
The initial cases of SARS appeared in Guandong, China in November 2002. However, China delayed reporting the SARS outbreak until February 2003 and the WHO finally issued a global alert on March 12 of that year. From the first official report of the SARS virus on February 14th 2003 to July 5th, 2003 when the WHO removed the last travel restrictions from affected areas, emerging market equities returned a positive 25 percent and the S&P 500 was up 19 percent. While past performance is not indicative of future results, we also note that while China delayed its reporting of the SARS outbreak to the World Health Organization, it has appeared to take a more globally proactive approach to counteract the coronavirus’s spread.
The situation continues to develop rapidly, and we will provide updates if it impacts our capital market views. For the time being, we encourage investors to remember the value provided by diversification across asset classes and regions. 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.
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