Coronavirus – Expect Volatility
The U.S government has just advised – “Do not travel to China.” On January 30, the WHO determined that the rapidly spreading outbreak constitutes a Public Health Emergency of International Concern. The virus has also become a major concern to the stock market and rightfully so. It’s always the unknown risk that comes as a surprise which has the biggest impact on the market. The ongoing uncertainty weighing on the minds of investors is whether or not the coronavirus will continue to spread outside of China? This will likely act as a fog over the market until this question is answered. Goldman Sachs warned that U.S. economic growth will be cut by 0.4 percent in the first quarter as the number of tourists from China declines and exports to Asia slows.
It is estimated that two-thirds of China’s economy is temporarily shut down. As you would expect, with less travel and slower economic activity, the price of oil has plummeted 17% since Jan 6th. Oil has fallen so much that OPEC is likely to call an emergency meeting to cut production. Bloomberg reports that OPEC may move its March meeting up a month so that they can rig the price higher by cutting supply. Other commodity prices have slumped on fear that Chinese demand will drop. Copper prices have fallen 12% because the virus will cause a downturn in construction and manufacturing activity in China. On the other hand, the coronavirus is increases sales of face masks and cleaning products.
This economic slowdown occurring in China has already caused a small correction in U.S. stock prices. It’s estimated that nearly 30% of S&P 500 revenue comes from foreign markets. It’s really anyone’s guess how long the coronavirus will continue to spread or if China can control it. This answer won’t be known for a few weeks because the virus has an incubation period of 10 to 14 days, during which the virus can be contagious, but the patient does not display symptoms. The stock market will be trading in a wider trading range with big moves up and down as new developments and breaking news moves stock prices.
As a reference case, there was a similar outbreak when SARS hit China in 2002 and 2003 and the downturn was limited and global growth rebounded sharply after the spread of the virus slowed. It’s not a perfect comparison because the coronavirus is more contagious and less deadly. Also, since 2002, China’s economy has expanded from 5% to 18% of the global economy. There will be ripple effects felt across industries as suppliers cancel projects and business subsequently slows. I believe that the duration of the travel ban in China will ultimately determine how long stock prices stay down. There are many investors with longer term mindsets already searching for buying opportunities. The best time to make money is when everyone else is panicking.
Over the last few weeks, I’ve made a few changes to allocations with the goal to lower volatility. My goal is to increase diversification in this election year and rebalance so that I can have some cash to buy at lower prices just in case there is a dip in the market. Even though markets fell the last few weeks, returns are still hovering around unchanged for the year. This sell-off hasn’t been all that bad unless you owned energy or commodity stocks which I have avoided. My focus continues to be increasing income and dividend yields. For my more aggressive clients, I’ve made less changes than my more risk-averse clients. My retired clients will see the most changes as I’ve added more bonds to their portfolios. At the present time, I believe that any economic slowdown will be temporary and I’m more concerned about the health and lives of people in China coping with this virus. Hopefully, the coronavirus is contained soon and we can all go back to worrying about politics again. 🙂 Until then 😷!
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