We entered 2020 with U.S. stocks trading at healthy valuations. Prices were justified, though not cheap1, so there wasn’t a lot of room for markets to absorb unexpected bad news.
Then, the coronavirus emerged in the Chinese city of Wuhan and continued to spread globally, leading the World Health Organization (WHO) to declare the outbreak a public health emergency on January 30.2 As of writing this, the number of coronavirus cases has exceeded 64,000 and the death toll from the outbreak is around 1,383, surpassing the 2003 SARS episode.3
As this news dominates headlines, markets are trying to estimate how the coronavirus could impact the U.S. and global economies moving forward.
U.S. markets have been bumpy over the last several weeks in the wake of the virus and when infection growth began to accelerate, the market turned negative.1
We have already seen an impact on China’s gross domestic product (GDP). Factories and manufacturers in China have been closed for weeks4 and the temporary travel bans and quarantines have caused major blows to Chinese tourism.5 Economists originally forecasted that China’s growth target for 2020 would be around 6%; now, it is estimated that China’s growth could fall to 4.5% this quarter.6 Considering the scope of China’s economy, this could potentially impact global GDP and trickle into other areas such as earnings growth.
An interesting point to consider here is how people being inoperative for several weeks can cause meaningful economic damage. The level of productivity of a given country is directly tied to its standard of living. Simply put, when people are productive, serve each other and contribute ideas to the marketplace, their standard of living increases.7 Therefore, when people are forced to sit idly by during times like these – no matter what percentage of the population is directly impacted it will inevitably have some sort of a drag on global GDP.
We have seen this economic principle play out before. During the housing bubble of 2007-20088, for instance, most people fulfilled their responsibilities and avoided defaulting on their mortgages. However, a small percentage of the U.S. population took on excessive risk and caused the entire financial system to collapse. It goes to show that events initially impacting only a small sector of the market can reverberate out and have far-reaching implications for the global economy as a whole.
Events like this have happened in the past and they will happen again. We don’t know where the next speed bump will come from, but in the meantime, we will continue to closely monitor the coronavirus outbreak and how it may affect markets.
Sources:
1. Yahoo! Finance – S&P 500
2. CNN – World Health Organization declares coronavirus a public health emergency of international concern
3. CNN – Global novel coronavirus death toll reaches 1,383 as China purges officials in Hubei
4. BBC News – Coronavirus: Much of ‘the world’s factory’ still shut
5. USA Today – Tourism industries suffer amid coronavirus outbreak: ‘China is a critically important market’
6. Bloomberg – Virus jolts China economy, forcing rethink on almost everything
7. Economic Policy Institute – The link between productivity growth and living standards
8. Investopedia – The fall of the market in the fall of 2008
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