News over the weekend
The number of new cases outside of China (South Korea, Italy, Japan and Iran) increased over the weekend. The increasing number of cases outside China has raised concerns that the virus could lead to a potentially longer and more severe disruption to global economic growth than previously thought. One positive piece of news over the weekend was the fact that the number of new cases in China has begun to level off.
Market reactions and the pull of the crowd
Given how early we are into the outbreak, it will be quite challenging for anyone to quantify the potential economic impact that the Coronavirus will have on any individual company, sector, or economy. As Bloomberg noted, “The level of anxiety, rather than the actual information, will dictate the market response, and that means that the market will be driven by crowd psychology. When a narrative takes hold, the Nobel laureate professor Robert Shiller now recommends that the best way to understand its effect on markets is through epidemiology. As Coronavirus becomes an epidemic in the physical world, we should expect the fear of Coronavirus to become an epidemic in the financial world.”
When we look at previous viral outbreaks, the moment interest by the news media reached its peak levels, also marked the low point for the stock market. Peter Atwater of Financial Insyghts pointed out how the magazine cover of The Economist predicted the peak of SARS and Ebola (Images below):
In both instances, The Economist magazine cover was able to mark the bottom of the stock markets decline.
What to expect in the short-term?
Going forward, China is expected to absorb the majority of the negative economic impact. However, we can expect the stock market to react in an emotional fashion. History has shown that once the outbreak is contained, markets tend to rebound rapidly. The performance of the S&P 500 and the Global Stock market following the outbreaks of previous epidemics are shown below.
Going forward
The global economy is still in position to bounce back from the negative effects of trade war. The Coronavirus may delay the timing of the rebound. Central banks around the world have shown a willingness to lower interest rates and ease other policy conditions to promote global economic growth. Do your best to ignore the noise and focus on your long-term investment plan.
Contact me if you have any questions or would like to discuss further.
Connor Ryan
905-895-4102
connor.ryan@rbc.com
Please refer to the John Hopkins CSSE for up to date information regarding Coronavirus.