BY: JOHN McCOLLUM
Chief Investment Officer / Argent Trust Company
John McCollum
The Argent Trust Asset Allocation and Strategy group met yesterday and discussed the current market environment and the global impact of the spread of the Coronavirus (COVID-19). There is a great deal of information and speculation floating around about the severity of the Coronavirus and the potential impacts both for global health and the global economy. We believe the best thing we can do is to focus on primary sources of information about the virus. We have included some of that information below.
Global market reaction this week has been significant. Yesterday, the S&P 500 fell over 4% and equity markets around the world were similar. Since recent highs reached last week, the S&P 500 has declined over 12% and futures indicate another down day on Friday. Bond prices have rallied with the 10 Yr. Treasury reaching a record low yield below 1.30%.
It is becoming increasingly likely that there will be significant economic impacts outside of China from efforts to contain the spread of the virus. These containment efforts have already affected global supply chains and cross-border travel. While there has been some apparent improvement in Chinese economic activity as workers return and business re-open there, in other parts of the world, measures are just beginning.
When investing, we know there is always the possibility for unforeseen adverse events. History and experience have taught us that being willing and prepared to tolerate volatility allows investors to better benefit from long term growth and compounding. The best way to prepare for the appearance of an event or period of uncertainty is to develop an investment plan which considers time horizons and risk levels. We know there will always be volatility, we just don’t know when it will occur, what will trigger it, or how long it will last.
As securities valuations have risen over recent years, in some cases faster than underlying earnings growth may have warranted, we have advised investors to be diligent in reviewing their asset allocations and reconfirming their time horizons. Our portfolio managers are already carefully looking at opportunities, which may be created by the selling and market declines while being mindful that there is much yet to be known about the extent and impact of the spread of this virus.
We will continue to monitor the situation and keep our clients and professional partners updated.
What is the Coronavirus?
“Coronaviruses are a large family of viruses that are common in many different species of animals, including camels, cattle, cats, and bats. Rarely, animal coronaviruses can infect people and then spread between people such as with MERS-CoV, SARS-CoV, and now with this new virus (named SARS-CoV-2).” (1)
What we know:
- Approximately 82,000 cases so far globally; confirmed cases in 9 new countries over the last 24 hours; c. 3600 outside China in 46 countries with these numbers rapidly changing (2)
- While cases in China are (reportedly) flattening out, new cases are being reported in many new locations
- Most people who become infected experience mild illness and recover, but it can be more severe for others. (2)
- WHO Director General reports the fatality rate is between 2% and 4% in Wuhan, and 0.7% outside Wuhan. (6)
- it takes between 2 and 10 days before people who are infected become sick and develop a fever (4)
- WHO has not declared it a “Pandemic” although we shouldn’t be too focused on what word is being used to describe the severity of this virus
Additional points:
- Market reaction so far is based primarily on “what-if”; i.e. what-if efforts to slow/eliminate the spread of the virus choke-off economic activity
- So, “by the numbers” the actual direct impact (sicknesses and deaths) have been very few (relative to global population); the bigger concern, for now, seems to be the impact of the “containment” efforts
- It seems very likely that China Q1 GDP will show material impact, and there will be unknown but likely important downstream effects from that
- Any other country that has significant outbreaks will likely take similar dramatic actions as China with similar downstream effects relative to the size of that country’s economy and global integration
- Other countries, in efforts to prevent arrival of the virus, may make cross-border travel/trade more difficult, again with possibly significant downstream economic effects
- While no vaccine exists, NIH announced Wednesday that rapidly developed initial trials had begun in with an initial patient participant in Nebraska
- The CDC has reported developments which improve the availability of testing (5)
- The CDC has reported 1 domestic case believed to have been spread by the “community”
- However, CDC warns the following:
- “It’s also likely that person-to-person spread will continue to occur, including in the United States. Widespread transmission of COVID-19 in the United States would translate into large numbers of people needing medical care at the same time. Schools, childcare centers, workplaces, and other places for mass gatherings may experience more absenteeism. Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths. Other critical infrastructure, such as law enforcement, emergency medical services, and transportation industry may also be affected. Health care providers and hospitals may be overwhelmed. At this time, there is no vaccine to protect against COVID-19 and no medications approved to treat it. Nonpharmaceutical interventions would be the most important response strategy.”
It is that last sentence, we think, that has frightened the markets with the implication of quarantines and other restrictions similar to what has occurred in China and other places and the economic impacts such measures may cause. We should expect continued volatility as news, good and bad, continues to be digested by markets. As previously stated, we will continue to monitor the situation and keep our clients and professional partners updated.
Resources:
- World Health Organization
- Center for Disease Control
- National Institutes of Health
- Johns Hopkins Global Dashboard
Notes:
- 1,5 CDC website https://www.cdc.gov/coronavirus/2019-ncov/summary.html
- 2,3,4 World Health Organization website: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/advice-for-public
- 6 WHO Media Briefing https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—24-february-2020
