The World Health Organization (WHO) declared novel coronavirus a Public Health Emergency of International concern on January 30, 2020. Such a declaration helps marshal resources, raise public awareness and potentially impact public travel to prevent the spread of such a virus. This declaration makes coronavirus one of nine disease outbreaks currently classified as an emergency by the WHO across 34 countries. Examples of other diseases currently classified as emergencies include Cholera, Ebola and Polio, which all affect thousands of people across the globe. Information such as this often comes as a surprise to individuals located in a developed nation such as the U.S. For perspective on an illness and disease more familiar to U.S. citizens, influenza (more commonly known as the Flu) has infected an estimated 22–31 million people in the U.S. from October 1, 2019 through February 1, 20202 leading to an estimated 12,000–30,000 deaths in this flu season alone2. Another prolific disease in the U.S., Cancer, took over 600,000 lives of people who lost their battle with the disease in 20193. The graphic on the left puts the noted figures in perspective visually depicting the unfortunate loss of life from coronavirus (white), the flu (light blue) and cancer (dark blue). Despite the frequent and eye-catching headlines in the news today, perspective does help establish the appropriate level of concern and response.
What about the Economy?
A historical review of similar scenarios where unexpected illness impacted the economy is hard to discern. Any reading of economic data during past periods like SARS (Severe Acute Respiratory Syndrome) in 2003 and MERS (Middle East Respiratory Syndrome) in 2012 cannot give us a precise picture of its impact. The simple fact is many factors are also influencing the economy at the same time. For example, in 2003 along with SARS the U.S. went to war with Iraq and a 6.3 Richter scale earthquake hit Iran killing over 20,000 people. These events along with other traditional economic forces also played a role in global economic outcomes.
Likewise, there are extenuating circumstances that could exaggerate the impact from this most recent outbreak. First, Chinese public health officials began restricting travel to limit the spread of the virus over the Chinese Lunar New Year, a period in which travel and holiday spending often occurs. This could have a larger influence on a drop in consumption than if this event took place another time in the year. Second, is the size of China’s economy. In 2003 during the SARS outbreak China as percentage of global GDP was approximately nine percent but has now grown to approximately 19 percent4. This naturally means any slowing in the region can have greater influence on global markets. Despite these two factors, we believe that the long-term impact is far more likely to be minimal and transitory rather than material and permanent.
While the situation is evolving, we remain hopeful the impact on global markets will also be transitory and not material over longer periods of time. With SARS as a historical precedent, we are able to see similar patterns to recent market reactions to the coronavirus. Markets near the location of the outbreak were impacted the most.
Also notable is the time period of impact was short and the recovery robust. We think this is indicative of the actual impact on the economy during this outbreak. Similarly, market reactions to coronavirus have also been most notable in international markets. Chinese authorities extended the closure of the Shanghai and Shenzhen markets after the Lunar New Year and this resulted in a fairly sharp reaction from investors of approximately seven percent sell off when markets reopened. In response, The Chinese Central Bank injected approximately $22 billion into the system to help offset the down draft. In spite of the evolving situation, year to date returns for China are flat.
Reactions among other global markets have been far more muted. The dollar is slightly stronger since the beginning of the year, and broad U.S. equity markets are up for the year. Generally, the more market sentiment sensitive portion of the fixed income market, has not changed materially in 2020.
We recognize the concern that such events can cause and do not want to understate the impact that the coronavirus has had on individuals, families and communities. However, we hope to draw context to the coronavirus’, and it will likely have limited long-term impact on the global economy and markets. We will continue to monitor the situation closely and will provide updates as necessary, though at this time we generally see no need to make changes to investment portfolios. Please reach out to your Legacy One Financial Advisor with any concerns or questions.
4 Capital Economics – Global Economic Update
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