Considering the news about COVID-19 (Coronavirus) and that markets are notably off this week, we wanted to provide you with a few thoughts on the subject.
Historical Context
In the past, similar outbreaks have been transitory and eventually pass; but the risk to markets is if the disease spreads much more than anticipated. Expert opinion remains divided on when COVID-19 will peak as it is more contagious, but less deadly than previous viruses. Currently, there are no known vaccines and speculation is that it would take about 6-12 months to produce one. The tail risk is that the virus spreads outside of China, shutting down production, disrupting supply chains, slowing economic activity and ultimately weighing on corporate earnings. It’s also unprecedented what happens when a country of 1.4B people quarantines 50M people.
Our Take on the Market Consensus
The consensus among most analysts is that any pullback in stocks would be minor (5-7% from highs) and short lived.
To date, there have been over 75 statements made by companies within the S&P 500 on COVID-19 which have been negative (source: Evercore ISI). Perhaps the most notable of these was Apple Inc. who guided that they would not meet 2nd quarter financial targets due to production that has been slowed or halted in China.
While we would rather have a vaccine than a rate cut, global central banks look to be committed to providing liquidity. For example, last night, the Bank of Japan mentioned they were prepared to act if the situation deteriorates.
Once again, the yield curve has inverted as longer-term rates have fallen. Markets are now pricing in 2 rate cuts by the Federal Reserve before year end (source: Bloomberg).
The anticipated slowdown in growth and disruption in supply chains is juxtaposed against solid corporate earnings. So far 442 constituent companies of the S&P 500 have reported 4Q earnings and revenue with 70.2% beating consensus (source: Evercore ISI).
The number of confirmed cases in China peaked on Feb. 17 and has been in a gradual decline since. The Hubei providence (where Wuhan is located) represents 75% of cases (source: Evercore ISI).
Bottom Line
For now, it appears markets are trading off the headlines, and our base case is that the volatility will persist in the short-term. Even with Monday’s decline, the S&P 500 is still positive for 2020 and coming off an exceptionally strong 2019.
This report is provided courtesy of Zach Barton of Barton Financial Group.
