To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 1.4%; the U.S. Dow Jones Index finishing down 2.5%; and the U.S. S&P 500 finishing down 2.1%.
As was the case last week, the coronavirus outbreak in China is dominating market sentiment and has led to a week of declines. Thankfully, these declines have come on the heels of an otherwise strong January, and it looks as though client accounts should still be experiencing a positive month overall. Further, in last week’s update I suggested that markets had experienced an exceedingly strong stretch since last October, and were a “correction” to materialize, it should surprise no one. The coronavirus outbreak may well be the catalyst to trigger such an outcome.
Of concern today specifically is the continued rapid transmission of the virus, as well as the observation by Dr. Anthony Fauci, Director of the National Institute for Allergy and Infectious Diseases, who stated: “there’s no doubt after reading this paper (a case of four German workers being infected, in Germany, by a Shanghai based colleague who exhibited no symptoms during her visit and only subsequently became overtly ill) that asymptomatic transmission is occurring. This study lays the question to rest.” Asymptomatic transmission is a fancy way of saying people can spread the virus even before they know they are sick.
Perhaps as a consequence of “asymptomatic transmission”, the transmission rate of the virus appears to be higher than some of the better known recent analogs such as SARS, Swine Flu, and MERS (Middle Eastern Respiratory Syndrome). On the flip side, surviving an infection appears to be a high likelihood event with an estimated 3% mortality rate at present (SARS was closer to 10%).
In last week’s update, I included a chart which illustrated that the market impact of viral epidemics have historically been fleeting. Quite the opposite, measured 6 and 12-months after the initial onset of an outbreak, markets have, in the main, generated surprisingly positive returns. Where negative returns were seen (less than 10% of the sample set), the losses were generally benign. If you’ve forgotten last week’s chart, here is a link to the update: After a Good Run Markets May be Due for a Correction - Might the Developing Asian Viral Outbreak be the Catalyst?
I should also add that I have posted to the “Curated Library” section of my website a timely and concise piece by our partners at RBC Global Asset Management looking at the potential market and economic impact of the current outbreak. You can access the article via my “Curated Library” section here.
Last thoughts on the coronavirus… I’d like to see sentiment turn on this outbreak prior to putting some of our defensive funds back to work in equities (i.e. stocks). There is no question that sentiment has turned negative in the short-term, and is unlikely to turn positive until the new patient count rate begins to slow. I’ve added a “clickable” live tracker of the outbreak from Johns Hopkins University to my desktop at work. If at all interested, the direct link to this tracker can be found here.
Moving on, despite the coronavirus concerns, I’m optimistic that key economic data due next week will indicate further strengthening of the U.S. economy. While a) the U.S. labor market has never wavered from being strong; and b) the “Services” sector - representing more than 2/3’s of the economy – slowed, but never contracted (i.e. shrunk); it was c) the manufacturing sector which has represented the greatest area of concern. Manufacturing activity has outright contracted (again, shrunk) for five consecutive months. That said, the degree of contraction has been modest and, further, regional surveys in important manufacturing districts (New York and Philadelphia in particular) have seen strong rebounds the past few weeks. Recent positive developments on the trade front (U.S./China, United States/Canada/Mexico) are likely to be supportive of a better print in the ISM Manufacturing Index to be released next Monday.
Lastly, two closing observations on topics which, on the surface, one would think to be of great importance to the markets and the economic outlook but which are proving to be quite the opposite – Impeachment and Brexit. It looks as though the impeachment trial of President Trump is going to reach its always inevitable conclusion – not guilty - later this afternoon. Whether or not Mr. Trump is morally guilty (Nick’s note: of course he is), that he would ever be convicted in a Republican controlled Senate has always been the remotest of long shots. So, it will come to an end and we will go into the November 2020 elections with Trump remaining as the sitting President as well as the Republican candidate for the next 4-year term. Markets have always expected this inevitable outcome and this is why there has been negligible reaction in the markets to impeachment proceedings and little commentary from myself.
So too, Brexit is set to finally happen at 3pm Vancouver time this afternoon (11pm London time and midnight Brussels time – Brussels being the EU capital is the actual determinant of what particular time the agreement takes effect). At this juncture, this too is a non-event. That’s because, owing to a negotiated transition period, nothing will really change at 11pm London time. UK citizens will continue to travel freely in the EU, as will EU citizens in the UK. The same with goods and commerce. However, the more critical date is December 31st, 2020 – 11 months from now. By that date, travel and trade agreements need to be in place to dictate the terms of commerce between the EU and the UK. Should satisfactory terms not be negotiated, Brexit may well yet prove to be messy. For now, that remains some way off.
To conclude, coronavirus is a concern in the short-term, and some meaningful slow in its transmission rate will likely be needed for me to put defensively positioned funds back to work. No overt defensive measures are currently being contemplated because past precedent suggests there will be little lasting impact from the current outbreak. Further, I’m optimistic that next week’s U.S. economic data will generally prove supportive of the economic outlook and, more particularly, there may be a meaningful improvement in manufacturing data.
That’s it for this week. All the best,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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