Cornerstone’s Week on Wall Street
Stocks experienced some short-term volatility in a holiday-shortened week in the U.S. last week as fears over the coronavirus outbreak in China came into focus for the markets. The S&P 500 was down 1.0% for the week, dragged lower by Energy (-4.2%), Materials (-2.3%) and Financials (-2.2%). Defensive sectors rallied, as interest rates fell briskly. Utilities (2.4%), Real Estate (1.0%) and Technology (0.3%) were all higher. Commodities were hit hard, (-3.1%) led lower by oil prices, and strength in the U.S. dollar, as investors weighed the potential impact that the virus may have on global growth.
Here’s what we know so far about the coronavirus as of the time of this writing. Currently, there are over 5000 confirmed cases of coronavirus infection resulting in over 150 casualties, predominantly in mainland China. Most of the confirmed cases have been in the central Chinese province of Hubei, where 16 cities, including the city of Wuhan, a city of 11 million and the origin of the outbreak, have been placed under lockdown. So far nearly 50 million people in China have been quarantined, and travel has been severely restricted if not completely shut down in an effort to restrain the spread. Outside of China, infection rates remain low, and the good news is that mortality rates for the disease are less than previous outbreaks such as SARS in 2003 or swine flu in 2009-10.
Source: New York Times
While the market reaction has been swift, and fears about the next global pandemic escalate, it’s important to keep perspective. The World Health Organization (WHO) estimates that worldwide, annual influenza epidemics result in about 3-5 million cases of severe illness and between 250,000 to 500,000 deaths annually. 1 In the U.S. the CDC estimates that between 9 and 45 million people are infected each year, resulting in between 12,000 and 61,000 deaths.2 So while the coronavirus is scary because it’s new and its effects remain unknown, at this point concerns about a Spanish flu redux are exaggerated. Much of the fallout will depend on how quickly the disease spreads, how lethal it becomes, and how quickly scientists can come up with treatment. In a positive development, scientists have already been able to sequence the genome of the coronavirus! It’s absolutely incredible that we have an understanding of the virus down to the molecular level mere days after the start of the outbreak and inspires confidence in our collective ability to effectively combat this disease.
As far as the market impact goes, in the short-term investors will likely react to headlines about the spread of the virus or plans to further cancel and restrict travel. When looking back at the long-term effects of past epidemics in U.S. stock markets, we found that while past episodes may have added to volatility, they did little to change the upward course of markets. The S&P 500 gained 31% in 1997 despite the combination of the Avian flu epidemic, Asian financial crisis, Russian default, and LTCM collapse. SARS began to infect thousands in 2003, but the S&P 500 still ended the year up 26%. The stock market posted a handful of down days in April 2009 following swine flu deaths but still gained 9.4% that month. Concerns over Ebola stirred in October 2014, though S&P 500 gained over 4% in Q4 that year.
As we mentioned earlier in the article, it’s important for investors to keep a proper perspective. It’s easy to get caught up in headlines about infection numbers and the death toll, which will undoubtedly be focused on by the media, and which are all outside of our control. What’s most important, and what we’ll continue to do each day is to focus on our process and what we can do today to make the best investment decisions on behalf of our clients.
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