02.03.2020 – Market Update
By Chris Perras, CIO.
Equity markets pulled back sharply late last week, as the ongoing coronavirus outbreak weighed on sentiment and began to drop global growth forecasts just after the China trade agreement had raised them. The S&P 500 fell 2.1%, with energy and materials the worst groups. Peak to trough the S&P 500, closing cash market, dropped almost exactly 3.25% since January 17th. This is still within the normal range of 3-4% for a 1st quarter.
The weakness came despite some big earnings beats from the likes of Amazon and Apple as well as many semiconductor companies.
For the record, here is how the S&P 500 fared around the other two major cases of external virus outbreaks, SARS and Ebola:
After the SARS outbreak during late-2002, the S&P 500 fell close to 15% peak-to-trough. In line with normal stock market seasonality, the equity market bottomed in mid-March 2003, right as the number of U.S. cases was peaking. Readers, please recall that the U.S. invasion of Iraq was taking place at the same time, so the true impact of the virus on the markets is very difficult to sort out from the war impact.
The Ebola scare was shorter in duration, and the equity market sold off about 7% in the span of about a month as U.S. cases were confirmed. The market then recovered just as quickly over about a month.
Versus earlier virus outbreaks, China is now has a much bigger global impact. The country has gone from accounting for about 4% of global activity when SARS hit to becoming the world’s second largest economy, now accounting for about 18% of global economic activity. Consumption now contributes 70% of China’s GDP, up from 40% in 2003. This means that millions of people stuck at home take on a much larger significance.
As investors, we try to take a multi-year view. We do not want to minimize the loss of life caused by the coronavirus nor its near term impact to the global economy. Our role as investors is to look through this turbulence, as this too shall pass, and take advantage of the opportunities created in the financial markets.
Trying to put the coronavirus in perspective. The annual flu season has infected over 19 million people globally. It has killed over 10,000 Americans so far in the 2019-2020 flu season. No one talks about it as a national disaster. Worldwide, seasonal influenza epidemics cause 3 million to 5 million severe cases every year and kill up to 650,000 people a year, according to the World Health Organization.
Currently, the Oak Harvest investment team’s base case remains the same. This is that the coronavirus and the flu will both be contained during the first quarter of 2020. Near term global economic growth will be hampered substantially as growth in China in the first quarter could easily be cut in half due to store closures and manufacturing shutdowns. Pre-virus, the U.S economy was going to take a 0.5% hit during the first two quarters of 2020 due to Boeing’s delay in its 737-Max manufacturing. We see early signs that the FAA will approve it by mid-summer with production beginning slightly sooner.
We currently expect the global economy to accelerate as we move through the year as inventory restocking begins and plants restart manufacturing lines. Moreover, all of the trade deals recently concluded by the U.S. with China, Mexico, Canada, Japan will ramp up as we move through the year. Currently, our overall outlook for stock markets for 2020 hasn’t change due to recent events.
Weekly market updates contain general information and expresses views of Oak Harvest Investment Services. Data, Articles, and information cited are believed to be reliable at the time of creation, but is not guaranteed. Content should not be regarded as personalized investment advice. Views and opinions expressed may change without notice and do not constitute a recommendation, or an offer or solicitation to buy or sell securities. In addition, Oak Harvest makes no assurance as to the accuracy of any forecast made. Past performance is not indicative of future results. Investing involves the risk of loss.
