Investment Commentary – February 25, 2020

Year to Date Market Indices as of Market Close February 25, 2020
• Dow 27,081(-5.11%)
• S&P 3,370 (-3.17%)
• NASDAQ 8,965 (-0.08%)
• Gold $1,639 (7.89%)
• Oil $50.18 (-18.13%)
• Barclay Bond Aggregate (2.76%)
• All World Index (-3.78%)
• Fed Funds Rate 1.75 (Three -0.25 rate cuts in 2019)
• US Real GDP Growth 2.1 Q4/2019

How the stock market has performed during past viral outbreaks, as coronavirus spreads to Italy and Iran

U.S. equity markets have experienced turbulent trade recently as investors keep watch of a deadly viral outbreak of COVID-19 in China. There are now 79,407 cases of COVID-19 in 32 countries and 2,622 deaths, according to the most recent reports.

However, gauged by the market’s performance during the onset of other infectious diseases, including SARS, or severe acute respiratory syndrome, Ebola and avian flu, Wall Street investors may have little to fear that the pathogen will sicken a U.S. stock market that finished 2019 with the best annual return in years and finished Thursday trade at all-time highs.

That said, many investors are recommending caution amid the current bout of coronavirus that was reportedly first identified late last year in Wuhan City, China. The ability of the virus to halt travel and harm consumption, particularly in Beijing, are some of the ways an outbreak is likely to have economic implications that could wash up on U.S. shores.

“Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons,” said Seema Shah, chief strategist at Principal Global Investors, in a research note, referring to the theory for the impact of unexpected events on markets and economies, popularized by Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable.

The strategist said a social-media driven news cycle, the interconnectedness of global supply chains and a pricey stock market, make Wall Street more vulnerable to a black swan.

“External shocks can derail economic trends and abruptly alter market sentiment. Not all risk is economic policy or monetary,” wrote David Kotok, chairman and CIO at money manager Cumberland Advisors, in a recent research note.

On Thursday, the Dow Jones Industrial Average DJIA, +1.31%, the S&P 500 index SPX, +1.46% and the Nasdaq Composite Index COMP, +1.78% all had been trading near records up until Monday.

However, investors have been attuned to updates on the spread of the disease.

Historically, however, Wall Street’s reaction to such epidemics and fast-moving diseases is often short-lived.

According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76% (see attached table):

Epidemic                     Month end                      6-month % change of S&P                   12-month % change of S&P

HIV/AIDS                       June 1981                                   -0.3                                                  -16.5
Pneumonic plague         September 1994                         8.2                                                    26.3
SARS                               April 2003                                 14.59                                                   20.76
Avian flu                         June 2006                                 11.66                                                    18.36
Dengue Fever                 September 2006                        6.36                                                    4.29
Swine flu                        April 2009                                 18.72                                                    35.96
Cholera                           November 2010                         13.95                                                     5.63
MERS                            May 2013                                    10.74                                                     17.96
Ebola                             March 2014                                5.34                                                       10.44
Measles/Rubeola         December 2014                            0.20                                                   -0.73
Zika                                January 2016                             12.03                                                      17

SARS resulted in a total of about 8,100 people being sickened during the 2003 outbreak, with 774 people dying, according to data from WHO and the Centers for Disease Control and Prevention.
Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus — a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12-month period.

Around the Web

Coronavirus concerns: With the coronavirus outbreak top of mind, major U.S. stock indexes felt the pressure. Although the S&P 500 and NASDAQ both hit record highs Wednesday, they were down more than 1% for the week, as was the Dow.

Fed minutes: In the minutes from its January meeting, the U.S. Federal Reserve indicated it’s likely to keep interest rates unchanged, expressing confidence in the U.S. economy. Fed officials noted they’re also remaining watchful of other developments—including the coronavirus and trade uncertainty—and how they may affect the economic outlook.

Dollar days: The U.S. dollar rallied against the euro, Japanese yen, and Australian dollar, reflecting the U.S. economy’s strength amid ongoing uncertainty. On Tuesday, the euro experienced its biggest drop in 3 years against the greenback. The yen dropped to a 10-month low Thursday, and the Australian dollar plummeted to an 11-year low as of Friday.

Crude awakening: U.S. crude oil prices ticked upward, reaching almost $54 per barrel Thursday for the first time in nearly a month. News of a smaller increase in oil supplies and falling gas inventories, based on figures from the U.S. Energy Information Administration, contributed to the price increase.

Upcoming Reports

Thursday: Fourth-quarter GDP, second estimate, U.S. Bureau of Economic Analysis

Durable goods orders, U.S. Census Bureau

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.