Coronavirus is spreading around the globe and the world stock market has pulled back from the recent strong rally that started in the second half of 2019. It’s natural to be concerned from a health and wealth perspective. We have seen similar experiences in the past with SARS, bird flu, and Ebola. If the past is any guide, then one can expect some volatility, but nothing catastrophic to your investment portfolio.
The market overall didn’t decline through most virus scares, but it did lose around 12% with Ebola. The market recovered that and went on to new highs in a few short weeks after.
This does set the background for a perfect storm with many past scares turning out to be something that gets contained in a resolute manner. I don’t believe there’s reason to panic, but the fact is nobody knows for sure how coronavirus will play out. It isn’t hard to imagine that if a dozen or more U.S. cities confirmed cases of the virus that we could start to see some people making a Costco run and hunkering down for a couple weeks.
China has already had to shut down cities with millions of people during their tourist season and that certainly brings economic risks. Like getting the flu and not eating for a couple days and then making up those calories, it can easily be remedied. It would be the prolonged period, across other continents that could have a more permanent effect. We will have to be mindful over the next few weeks to see what direction it heads.
I believe whenever the next recession starts, that it won’t be the U.S. that starts it this time. It’s a wide field to guess who will start it, but I have long thought it would be China. That’s not an unpopular opinion. They’ve been the engine of global growth over the last decade and more. They have done so through using trillions of debt that dwarfs what we saw here in the early 2000’s.
If their economy sputters into a financial crisis, it could set off instability with the rest of the world. Trillions of dollars are intertwined with the global market. Cornovirus complicates the intricacies of this equation. With all things, it will take time to see the true impact it has.
I’ve argued to remain optimistic on the market for years in this column. I believe we should remain so, but watching what the global economy does over the next 12 months is important. Growth has been slowing overall, and the rally has been on the belief it will re accelerate from stimulative responses of global central banks.
If you’ve read my column before, you know I have a line of demarcation where we would shift to a strongly defensive mode. The good news is that it has risen above the levels we saw in summer 2019. Additionally, the market favors higher prices from many fundamental standpoints. The market went on a tear over the last 4 months and needs to digest the new altitude. An Impeached President, Bernie Sanders potentially winning the nomination, coronavirus, these things may be the perfect excuse for the market to rest and create some needed doubt.
Bull markets climb a wall of worry. Over the last few weeks the only worrying I heard was over missing out on more gains. Let’s give things time to play out before jumping too hard to conclusions that politics and coronavirus are going to end the bull market.