Three Perspectives for Understanding the COVID-19 Coronavirus and its Impact; Weekly Updates February 24, 2020

The coronavirus continues to challenge health care officials and curtail economic activity. The virus seems to be spreading more slowly within China, and there are reports workers are slowly returning to their jobs or working remotely. Cases in South Korea and Italy shot higher, while Iran reported a high percentage of fatalities relative to a limited number of cases.

Key Points for the Week 

• Stocks dropped as the coronavirus appeared to slow in China but expand in other countries, including Italy and South Korea.
• Corporations continued to combat decreased demand in Asia.
• Yields on long-term government bonds approached or hit record lows, while stocks reached the highest forward P/E since 2002.

This commentary originated on Carson Wealth here.

Global economic activity remains sluggish as we await economic data for periods since the virus began to spread. Japanese GDP shrunk dramatically in the fourth quarter as a sales tax increase pushed consumption into prior quarters or delayed it.

Investors traded in their optimism for a dose of reality as the recovery from the coronavirus appeared farther off than originally anticipated. The S&P 500 lost 1.2% last week. The MSCI ACWI also sagged 1.2%. The Bloomberg BarCap Aggregate Bond Index climbed 0.6% as concerns about slowing growth pushed interest rates on 10-year bonds to new lows before rates rebounded.

Investors will likely continue to focus on information companies provide about how the virus is affecting operations and profitability. In coming weeks, the economic data will start reflecting periods when the virus was known to be expanding. That data will provide further insight into the effect the coronavirus is having on the global economy.

Three Perspectives for Understanding the COVID-19 Coronavirus and its Impact

The world continues to struggle with containing the coronavirus even though the disease seems to be spreading more slowly in China. Assuming the measures taken in China continue to modestly improve the situation, there are three other factors we are watching closely to gauge the impact on the global economy.

The spread of the disease to other countries is very crucial. The measures to prevent the spread generally slow economic growth. The number of cases in South Korea and Italy both spiked last week. Iran has a relatively low number of cases, but it has experienced the second-highest death toll of any country. The high number of deaths raises questions about how accurate the number of Iranian cases actually is. Prior to these recent increases, China seemed to be the biggest threat, and there were more cases on the Diamond Princess Cruise ship than in all the other countries combined. If the virus continues to spread to other countries, the negative economic consequences will likely expand with it.

Another key factor is the pace at which workers return to work and production is able to ramp up. Some Asian airlines are forcing workers to take unpaid leave as demand has shrunk. Many Chinese employees are working from home, and factory production remains stalled from a shortage of workers in the supply chain. Investors should be prepared for price spikes or declines based on the goods. Some goods will jump in price as supply shrinks and demand holds steady. For instance, garlic prices surged as Chinese suppliers weren’t able to export enough. Goods tied to a broad set of economic activity, such as oil, remain under pressure as demand has declined.

Finally, Chinese economic data will need to accurately reflect the economic slowdown in the first quarter. Because the Chinese government doesn’t appear to have been forthright about the disease in its early stages, the economic data it reports will receive extra attention. During normal quarters, China’s GDP can be confidently projected to meet its target because the government pulls out all necessary stops to reach it. This quarter, the slowdown may be more than it can compensate for, or the steps taken to keep growth strong may be extreme. Inaccurate data or extreme stimulus could further undermine the situation and raise concerns in future quarters.

Many of these data points are hard to measure or measure quickly. The bond market provides a great place to see how investors are trading off the various risks and probabilities. As opposed to the more optimistic stock market, bonds have dropped in yield, which signals concern for future growth. As the accompanying chart shows, U.S. bond yields have dropped sharply in response to the virus. A bounce back toward higher yields will help us determine whether the damage being done by the virus is beginning to wane.

Reader Questions

[The first quarter provides us a number of opportunities to interact with some of our readers. For the next month, we’ll share some of the questions we get from readers.]

The yield curve just inverted again last week. Does this mean a recession is likely?

Yield curve inversion was a key issue for markets one year ago. An inversion means longer-term yields are lower than short-term yields. Analysis has often focused on comparing short-term yields, such as the three-month, one-year, and two-year, to the 10-year yield. Last week, the 10-year dipped below the three-month yield.

The recession thought to be coming hasn’t happened yet. The Federal Reserve cut rates, pushing short-term rates lower, while employers kept hiring, and a recession was averted. Indicators are just that, indicators. They can be accurate, but they are best thought of as pieces of the economic puzzle rather than definitive causes of a recession.

Disclosures:

This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.