Investors woke up on Monday morning to stock markets sinking around the globe. Growing fears that the China coronavirus could slow global economic activity sent stocks tumbling.
The fast-spreading pneumonia-like virus was first identified in China on December 31, 2019 and has now spread outside mainland China. As of January 27, a total of 2,700 confirmed cases are known inside China with 80 deaths. That number is rising every day. Currently, 5 cases are known in the U.S.
The virus is a big deal and we don’t yet know how long it will take to contain it. The ultimate impact to global economic growth is also a big unknown, which triggered the Monday morning stock market sell-off.
Despite the scary headlines, for now, the World Health Organization has not designated this a global public health emergency. Yet, some are comparing this to the last major disease that began in China – SARS in 2003.
Scientists say this new coronavirus, which is believed to have jumped from animals to humans, is about 70% similar to the SARS virus seen 17 years ago.
A key differentiator is that the incubation period for the new coronavirus is longer. Some scientists believe it could be as long as 14 days, which means anyone who comes in contact with an infected individual during that period could also get sick. The longer “contagious period” means this virus could spread more easily.
The good news is that the initial response with travel restrictions and other efforts to contain the spread has been faster and more effective than the world saw in 2003 with SARS.
Realistically, this event is still just getting started. The human toll could be high. It remains to be seen how effectively governments around the globe will ultimately be able to contain the virus.
Here in the U.S. we have two sets of concerns. First, will this virus impact us or our loved ones? Second, what could this mean for our investment portfolio?
Fortunately, inside the U.S., the situation appears to be under control. Early reports suggest the new coronavirus has a mortality rate lower than the SARS outbreak at only 3% versus 9% back in 2003.
For your investments, there could be a real impact, at least in the short-term.
Looking at the SARS example, the S&P 500 dropped 12% in the 5-month period starting in mid-November 2002 until mid-March 2003. In 2014, the MSCI index of global equities fell 8% at the height of the Ebola concerns.
In the short-run, economic activity could slow in China as consumers stay home and don’t spend. The South China Morning Post estimates a decline in economic activity between 0.5%-1% from an overall 5.9% reading. The impact is meaningful, but not devastating.
Looking back at history, once the diseases were under control, economic activity returned and the stock markets recovered. In the short-run, this could be a trigger for a 10 or even 15% decline in stocks. It could prove to be short-lived if the coronavirus is quickly contained. We still don’t have all the answers.
The price of gold firmed early Monday as investors turned the precious metals as a safe-haven and hedge. On Monday, gold traded around $1,580 an ounce – over $250 an ounce higher than it was trading in January 2019.
The early response to this coronavirus from governments around the globe is an important and reassuring development. For your portfolio, this is just another argument for diversification into tangible assets. Gold is already in an uptrend and if the stock market remains under pressure, more upside is expected.
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