Coronavirus Infects Markets - Adviser Investments

Coronavirus Infects Markets

February 3, 2020

The weight of uncertainty surrounding the spreading coronavirus in China and beyond has dampened traders’ optimism. The third impeachment trial in our nation’s history and the U.K. formally leaving the E.U. tonight have not helped sentiment either. After a bullish start to the new year, investors’ enthusiasm is fading. Unless we see a major reversal in the markets today, stocks will have fallen three out of five days this week.

Still, stocks are higher for the year, though bonds are challenging for the lead. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index have returned 1.2% and 1.8%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 1.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has declined to 2.06% from 2.18% last week, and from 2.31% at 2019’s end. On a total return basis, the U.S. bond market has gained 1.8% for the year.

Coronavirus Fears Spread, Markets React

This week’s dominant news story has been the ongoing spread of the coronavirus, with new cases being reported around the globe and major corporations suspending operations in and around China.

A decent start to earnings-reporting season and solid economic reports have helped offset coronavirus fears. But the toll on companies doing business with China or manufacturing their goods within its borders is beginning to affect stock prices.

Certain business sectors are being hit harder than others. Airline stocks have generally been under pressure; British Airways canceled all flights to China earlier this week, and American Airlines, Delta and United Airlines followed suit today. Additionally, companies making goods in China or relying on parts from its many industrial centers may find their supply chains disrupted. For example, Apple is launching 5G-capable phones later this year, and any delays in their manufacture could materially impact sales and earnings.

Of course, the question is: How severe will these disruptions be and how long will they last? If things are back to normal within a quarter or two, then earnings will just be delayed. For example, if you’ve always wanted to travel to Southeast Asia, maybe you’ll delay that trip until next year. And if you are tied into the Apple ecosystem, you’ll probably still get that new iPhone, even if its release is delayed by a few months.

We expect short-term, fear-driven volatility to continue to plague the investment markets. (Chinese markets have been closed for the lunar new year holiday—we wouldn’t be surprised to see a 10% haircut during the first trading hours when they reopen on February 3.) Our models will continue to monitor the market’s signals—if the sickness seems likely to have global markets convalescent for any length of time, we will be ready to become defensive in our positions. For, now like much of the world, we watch and wait.

Slow Growth Still on Course

According to preliminary numbers, the U.S. economy grew at a 2.1% annualized rate in the fourth quarter—on par with the prior quarter. For the year, U.S. gross domestic product (GDP) grew 2.3%, slower than 2018’s 2.5% and 2017’s 2.8% growth rates. But looking at calendar-year rates is like looking at point-in-time performance for mutual funds and markets. Let’s widen our perspective. The chart below compares GDP on a rolling, 12-month basis with the three-month annualized numbers commonly quoted in the media.

Source: Federal Reserve Bank of St. Louis (FRED).

Viewed this way, a clearer picture emerges. Economic growth peaked in early 2015, slid for about a year-and-a-half, rebounded a bit into mid-2018 powered by tax cuts, and since then has been on a steady decline. That’s one reason we continue to refer to this as a slow-growth-not-no-growth economy.

Housing Points to Economic Strength

One sign that the economy is okay can be found in the housing market. But you have to get away from the headline numbers a bit to see it. In December, sales of new homes fell for the third straight month.

Yet, sales in December were 23.0% better than they were a year ago, when the stock market was dropping like a stone and probably scaring people away from big purchases. Prices are also slightly higher than a year ago.

Meanwhile, sales of existing homes, a market that’s eight times larger in terms of units, were up a robust 3.6% in December—the best monthly gain since February 2019. Lower mortgage rates certainly help. Year-over-year sales were up 10.8%, the best rate in three years.

Those are positive numbers and suggest that Americans remain confident enough in the economy to make big-ticket purchases. The bottom line for us is that the U.S. economy remains in a slow-growth-not-no-growth mode in the midst of swirling global tensions and uncertainties.

*****

Financial Planning Focus
Do You Have an Emergency Fund?

The cornerstone of a strong financial foundation is a solid emergency fund. When we work with our clients to build their financial plans, the first thing we determine is if they have enough rainy-day savings.

An emergency fund is exactly what it sounds like: Money set aside for unexpected situations. Let’s face it, life throws us all a curveball on occasion. A roof may spring a leak, your car wears out, a child needs emergency surgery or your income suddenly disappears.

The trouble is that we’re not always great at preparing for the unexpected. A recent survey by Bankrate.com found 25% of Americans have less than three months of living expenses saved up, and 28% have no emergency savings at all. This means that for more than half the country, even a small wobble in their day-to-day finances could leave them in dire straits.

Building up six months of expenses may seem daunting. We believe in setting small, achievable goals.

While no one can predict the future, we can prepare for it. Your rainy-day fund should be easily and readily accessible. That doesn’t mean a cookie jar of cash, though. A simple checking account at your local bank with ATM access can be a great option. A money market account with check-writing privileges is another alternative.

Of course, you also need to determine how large your emergency fund should be. One longstanding rule of thumb is to keep six months of living expenses at the ready. Two-income households might consider budgeting for a minimum of three months of living expenses instead. High-spending households might need more.

Building up six months of expenses may seem daunting. We believe in setting small, achievable goals: Start by saving just one month of expenses. Once that’s done, you can begin working on other savings needs while continuing to build your fund.

If you would like our assistance in creating an emergency account, determining how much should go into it and then funding it, please contact your wealth management team. We are happy to help!

*****

Looking Ahead

The coronavirus is likely to continue dominating headlines and influencing sentiment next week. Potentially offsetting the headlines, earnings reports will be flooding in, and economic reports of significance will, too: Manufacturing and service sector data, construction spending and car sales, ADP private sector and nonfarm payrolls jobs reports among them. We will be watching closely.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.


Please note: This update was prepared on Friday, January 31, 2020, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

© 2020 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.