Select Page

Coronavirus

Impacts of the coronavirus on the U.S. Market and Economy


A market and humanitarian message from Envoy Financial

Now is a time for clear thinking and a sound mind. The coronavirus is another in a series of medical anomalies impacting our world. Our first task is to pray for the safety of all our Christian workers and fellow men and women of faith around the world. Next to pray for all those affected and their families for healing. Then for all who are impacted. There is a family of four, in a city 1500 miles from the outbreak, that are quarantined in an 800-square-foot apartment for four weeks. They have two children who cannot play outside or go to school. We pray for them.

There is both a real impact on the economies of the countries where the virus has spread, and the ripple impact across the world. This impacts the U.S. market and the accounts you have with us, but in a controlled fashion. I’ve asked Tim Newell, President of Harvest Investment Services, to share his information and perspective. Please read it. While it is not short, we seek to inform our participants on the given situation. By way of disclosure, Harvest Investment Services and Envoy Financial have come together to strengthen both companies and our services to you.


 

Tim Newell’s insights into our current economic situation

Report as of 2/26/2020

The Equity markets reached a recent peak last week on February 19th. Stocks dropped in a dramatic fashion over this last week as we began to hear reports of a spike in coronavirus cases outside of China. This news has spurred a massive wave of stocks selling off. The S&P 500 plunged over 3% on both Monday and Tuesday, which put the loses from the top of last week in excess of 8% as of Tuesday’s close (02/25/2020).

Most of the selling seems to be triggered by reports of increased cases of COVID-19 (coronavirus) in South Korea, Japan, Iran and Italy. This is a major shift in the outbreak’s narrative. Previously, most of the cases had been isolated in China. Additionally, there were and are growing concerns that the outbreak could find its way to the United States.

Anytime something like this affects market selloff, we at Harvest Investment Services feel it is prudent for us to do the research. It is important to understand and to separate facts from fears. With that said, here is a brief summary of our research on the topic and its effects on the market.

Coronavirus Facts and Fears

Up until this week, markets have pretty much ignored the coronavirus. The sudden explosion in media concern regarding the spread of the coronavirus has played a major role in the market’s decline. The effects of the coronavirus on U.S. markets were accelerated yesterday when a spokesperson of the CDC said it was a question of when, not if we see the disease spread to U.S. communities. This statement caused significant reactions of fear in market responders.

This warning came despite-the-fact that there are only 14 confirmed cases of the coronavirus in the U.S. This excludes the 43 Americans repatriated from both Wuhan, China and the Diamond Princess cruise ship. Additionally, those 43 have been held in quarantine in Nebraska since they arrived back in the States. Regardless, a warning of this type represents a new escalation in economic and market fallout for the U.S. from the disease. Up until now, analysts have considered any headwind on the U.S. economy to be a side effect of a global slowdown. If the CDC is correct and COVID-19 does spread substantially throughout the U.S., it could have a direct (and more significant) negative impact on the economy.  

In some ways, if these types of warnings continue, it might not matter whether they are correct. This is because it can create a situation where fear spreads among people, which causes an economic slowdown regardless of the spread of the disease. Put more directly, if someone from the CDC says the coronavirus will hit U.S. communities, and that we should prepare for work and school closures, it increases the likelihood that people stay in, don’t go out, and effectively manufacture an economic slowdown regardless of whether that actually happens.   

Given these warnings, we researched the latest information on the spread of COVID-19, and while clearly the spread of the disease to numerous countries is disconcerting, there are also some positives. Here is a breakdown of the spread of the virus in 5 easy points:

 

  1. Things are getting better in China.
    More than 77,000 of the 80,400 COVID-19 cases are in China. The number of remaining cases across the globe number approximately 3,500. On Tuesday, the CDC announced an additional 508 coronavirus infections in China, but only nine occurred outside of the Hubei province (where Wuhan is located). Those nine infections outside of Hubei are the lowest since January 20th, implying China is now effective at keeping the spread of the virus contained to one province. Additionally, the World Health Organization recently stated that transmission of the virus peaked in China on Feb. 2, and it has been declining since then.  

  2. There are 900-plus cases of coronavirus in South Korea.
    More than half of the infections are members of the Shincheonji Church of Jesus, located in Daegu, more than 150 miles from Seoul. All 200,000 plus members of the church will be tested for coronavirus.

  3. Iran has admitted to having 61 coronavirus cases.
    Although, several articles implied Iran was understating the number. Additionally, Iran has exported the disease, with coronavirus appearing in Canada, Turkey and the UAE following travel of infected people from Iran to those countries. However, most nations have suspended air travel to Iran (including Tukey, the UAE and others) and Oman has suspended port operations with Iran, so the country is being isolated. 

  4. 800 people in Japan have tested positive for coronavirus.
    Nearly 700 of those were aboard the Diamond Princess cruise ship (so only a few more than 100 cases remain outside of ship).  

  5. In the U.S., only 57 people have tested positive for coronavirus.
    Of those people, 43 were on the Diamond Princess or were extracted from Wuhan, China. Outside of those two groups, there have been 14 confirmed coronavirus cases in the U.S. outside of those two groups. 

 

Observations of some of the Facts and Fears

First, it’s important to acknowledge that COVID-19 is a human tragedy. We would never take human life and suffering lightly.  Looking at data can make people appear cold. The reality is that all we are trying to do is understand the situation.  There are currently over 80,000 worldwide confirmed cases and 2,700 deaths from the coronavirus COVID-19 outbreak. This is, no doubt, a big number and continues to grow. However, the pace of growth appears to be slowing.

Much of the pessimism surrounding the virus focuses on the Chinese under-counting the number of infected to save face. It’s important to note that a shortage of specialized test kits has caused health officials in many countries to rely on observable symptoms for diagnoses. Because coronavirus mimics the flu and pneumonia in its early stages, it’s also possible that authorities may be over-counting as well.

Understanding the virus by the numbers

Instead of looking at it from a “total of confirmed cases” perspective, we ought to consider the total of active cases in order to gain a more precise look into what is happening. This measure takes total confirmed cases and subtracts deaths and recoveries. This gives us the total amount of people who have the potential to spread the virus further, as well as decline in active cases.

According to Worldometer, which aggregates statistics from health agencies across the world, total active cases peaked about a week ago at 58,747 and have since been declining. Even with new cases arising in South Korea, Italy and Iran (where data is suspect), there have been 30,597 cases with an outcome (2,699 deaths and 27,898 recovered).  In other words, the total active cases now stand at 49,923, a 15% drop from its peak on February 17th.

Here is a link to a  great website that can help you get access to the data: https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

Putting the numbers in perspective

One death is too many. However, it’s important to put that number into perspective. According to the World Health Organization, in the United States alone for the 2019-2020 season, there have been at least 15 million flu illnesses. Of those cases there have been around 140,000 hospitalizations and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of this annual flu—case by case, hour by hour.

It’s true that the death rate from COVID-19 appears to be around 3% in China. This is much higher than the death rate from the normal flu. Yet, like the flu, this increases with age. Additionally, outside of China the death rate is far less than inside China, roughly 1%. On top of that, there is already an active drug that will combat COVID-19 moving toward first phase clinical trials.  It took three months for this to happen in 2020, versus 20 months for SARS back in 2002/03—a true testament to advances in drug technology.

So, what about the markets?

Frankly, it’s amazing to us that the market had been so resilient!  Perhaps it’s because our recent history with stocks and viruses is that markets tend to overreact. This leads to significant buying opportunities along the way.  Over a 38-day trading period, during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%.  During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%. There are other examples, several examples, but they all passed, resulting in the market’s recovery and rapid move back up hitting record highs.

What should we expect from the economy through the rest of the year?

From a macro-economic point of view, the real question is: how will this impact the US economy over the coming year? In short, our view has not changed. We believe the U.S. is relatively insulated with a fantastic health system. The U.S. started the year with solid economic data. So far, nothing has changed. In fact, with all the data we already have on hand, we are expecting around 2% growth in Q1. Most of the impact to the U.S. from the coronavirus will come in Q2.

Imports and Exports

Capital goods exports to China along with imports from China are sure to be depressed given the struggle to reopen factories abroad. Most Chinese factories are still only operating at about 50-60% of capacity. Shipping giant, Maersk, has already said it has cancelled more than 50 trips to and from Asia. With China being home to seven of the world’s busiest container ports, there is bound to be some impact. Inventories in the U.S. are projected to deplete more rapidly, but once the virus subsides, we can expect faster accumulation of inventories in the second half of the year beginning in Q3.

Revenues and Earnings

Revenues and earnings from companies that are highly exposed to China will be greatly affected. China being shut down for a month will have a global impact.  Lower earnings in the first half of the year should be made up by a strong rebound in the second half of the year with returns from lost months.  Demand remains strong and there has been no visible impact yet on the job market as shown by initial unemployment claims. Supply disruption is the primary issue. We suggest looking through any earnings weakness as we expect it to be transitory.

An additional nugget of good news is that many companies had already been shifting supply chains from China due to the Trump Tariffs. If they weren’t considering it before, they will be now as they realize the importance of diversification. Expect this trend to continue to accelerate moving forward.

In Conclusion

The U.S. consumer is on solid footing and will continue to be one of the key drivers to U.S. economic growth in the year to come. It is due to the consumer that the market began to show effects only after fear was spread in the dynamic media presence of COVID-19.  We believe that just like all the other viruses, which have come and gone in the past decade, the coronavirus will be no different.  Some have suggested that the 1918 Spanish Flu, which killed hundreds of thousands in the U.S., could happen again.  No one knows for sure, except that it’s not 1918 anymore.  In 2020, technology and news move much faster and the U.S. rebounded from the Spanish Flu when all was said and done.  We suspect that any drop in earnings or economic activity will be short-lived and more than made up for within the year.  Don’t panic. Most of the time, investment decisions based on emotion and fear don’t turn out well.

One of the verses I think of in times like this is: 2 Timothy 1:7 – “For God has not given us the spirit of fear; but of power, and of love, and of a sound mind.”

In summary, what we are suggesting in uncertain times like this, is to be careful how we let the news or noise of the day affect our daily decisions. To resist responding in fear and embrace long term logic and reason.   It is important to take to heart those who have been personally affected by the coronavirus, because, again, to reduce it to numbers would be to ignore the human tragedy.

We appreciate the trust that you have placed in us to partner with you in the stewardship of your financial resources.

In His Service,
Tim Newell, Managing Director

 


Envoy Closing Remarks

Thank you, Tim, for your insights. We are pleased to partner with you and look forward to enhanced insight into market activity in the future.

To all our participants, as mentioned previously: thank you for your trust and confidence in our ministry to and with you.

Bruce Bruinsma
CEO, Envoy Financial