How concerned should investors be about the Coronavirus?

Two weeks ago, I broke my right foot. It was the first time I have ever broken a bone. There is a good story about how I broke my foot, but I will not send it out to the world via email. My orthopedic doctor told me that I would need to wear a boot and that it will take 4 to 6 weeks to heal. It really hurt when I broke my foot but over time the pain is fading. Two weeks after the break, I am not in pain. It is my understanding that after the foot heals, it will heal stronger. My broken foot reminds me of the Greek economic crisis, SARS, Asian Bird Flu, and now the Coronavirus. These all are terrible things. To start talking about the Coronavirus let me say: The world has not ended.

For most of this year, U.S. equity markets have largely taken the Coronavirus outbreak in stride. The ongoing message is that we will continue monitoring and watching the outbreak. The U.S. is among the worlds’ best equipped nations in terms of preparation and ability to respond to an epidemic, while its mostly domestic driven economy is insulated somewhat from global headwinds. Nevertheless, the expected hit to U.S. growth appears relatively minor and short-lived with most estimates shaving perhaps a total of 0.1-0.2% off GDP over the next two quarters.

Globally, the impact will be more significant, particularly in China, which is suffering the brunt of the spread of the virus. Short term pain, like the SARS virus will pass and then investors will continue focusing on the longer-term outlook.

The stock market will remain volatile as it reacts to the media cycle of the fear. If you turn on any news channel, CNBC, Fox, CNN, you will detect a tone of fear. These are the same fears that cause people to watch the weather channel when a Hurricane is 5 days away and never makes landfall. This type of fear sells a lot of advertisements for television networks.

Still, it is important to recognize that most of the disruption in economic activity won’t be a permanent loss, but rather postponed until business operations and consumer activity normalize once the outbreak is contained. After SARS was brought under control, for example, Chinese consumer demand quickly rebounded and the economy recovered strongly as a result.

The good news is that there is low unemployment and low interest rates in the U.S. fueling our economy. The tragic news is that people are dying from this disease. The other bad news is that people are afraid of traveling to foreign countries and the cost of goods (for products dependent on China) will go up. This may cause U.S. companies to raise their prices. However, the U.S. consumer seems to be willing to absorb an increase in pricing.

The good news is that the Coronavirus outbreak has arrived at a time when the global economy is showing early signs of rebounding growth, with improvement in the international inventory cycle, diminished Brexit and trade war risks, and a strong tailwind from last year’s synchronized monetary stimulus. Also, the U.S. decrease in corporate tax rate makes our companies more competitive.

My foot will heal. The virus will be contained. U.S. consumers will continue buying goods. The media will still report on fear.

Peter Blatt

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