Feb172020

Money Matters - Corona Virus and the Markets

With the Corona Virus making the main stream news, investors may be asking how much influence could the outbreak effect markets as the situation unfolds. As of this writing, over 41,000 cases worldwide have been reported with 910 deaths and 3,350 recovered.  By the time you read this those numbers will have likely have vastly increased. The vast majority of cases and deaths have occurred in mainland China, the location of origin but the virus has spread to dozens of countries worldwide.

 

The last serious virus that received worldwide attention was the SARS virus, a version of the corona virus family which broke out in China in the spring of 2003. 8,098 confirmed cases were reported with 774 deaths. Gross Domestic Product (GDP) in China fell about 1% as a result of SARS but overall markets held gains throughout the crisis with the MSCI World Index staging a gain of 21.56% in the six months following (Marketwatch).

 

That said there are many factors that could have influenced markets in the respective time period so conclusions are difficult to draw from the markets past performance.

 

Today China is a much larger player on the world stage having grown to the second largest economy in the world, behind only the United States in GDP. The current strain of Corona is more virulent, affecting 3 times as many people in the few short weeks since the outbreak hit the newswires. SARS, compared to this new strain appeared to be more deadly however, killing about 9.5% of people infected, while the death rate of this strain is about 2%.

Advance medicines and quarantine methods may have a lot to do with the lower mortality percentages. Being a more aggressive strain based on the number of people infected compared to SARS, just how far and how long the crisis will persist is unknown.

 

The fact is the virus is spreading exponentially, a reality of the nature of the beginning stages of contagious diseases. The more people that become sick, the more they themselves end up exposing other people through proximity or direct person to person contact.  

 

As investors, we must take things into consideration both pragmatically and at the same time with foresight as to what COULD happen. Considering it is estimated that up to 42.9 million people fell ill during the 2018-2019 regular flu season, 647,000 people were hospitalized and 61,200 died, we have to put things in perspective. More people die from the regular cold and flu season yearly compared to Sars and Corona (so far).

 

It’s not so much about the actual damage the illness might do to the population but more the FEAR of the virus. With fear comes less travel and less comingling by consumers which translates to reduced spending. This is what causes the real damage to economies and subsequently the markets they represent. Indeed some of the photos coming out of China of some of the large metropolises looking like ghost towns is concerning.

 

The fact that the Lunar New Year is also happening in China. This popular holiday season has a significant contribution to China’s GDP due to the massive travel and celebration the holiday usually fosters. With many Chinese people staying home it will certainly put a dent in consumer statistics. Considering tariffs are also taking a dent out of China’s economic growth, this outbreak couldn’t have come at a worse time.

 

Concluding, if the Chinese economy falters big time, it may have more of an effect on stocks worldwide than is currently being priced into the markets. Unless Corona is soon contained, a lingering presence could rattle markets long term with severe consequences being possible. Keep in mind no one can forecast market direction at any time and past performance does not in any way indicate future movements in the markets.

 

This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Investing involves risk. You can lose money. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249.