Economic Commentary – Coronavirus Truths

coronavirus truths

Coronavirus Truths

Concern over the Coronavirus continues to hit financial markets.  The decreases in the Dow Jones Industrial Average and the S&P 500 indexes are pricing in both a decrease in short-term profits and a whole lot of fear.  This is the first social media panic for a flu, and the rapid spread of information – even bad information – is unprecedented historically.  Nonetheless, truth will prevail, and we’d like to again take some time to focus on truths.

Enclosed is a graph, prepared by First Trust from Bloomberg data, showing how broad equities have performed during previous name-worthy illnesses.  As we can see, there is tremendous precedence for market recoveries, especially when the underlying economic situation before the crisis was strong.

That is how we see the CoronaVirus downturn; it has come at a time when our underlying economy was particularly strong.  The Atlanta Fed projects real GDP will grow at a 3.1% annual rate in the first quarter.  January and February nonfarm payrolls grew at strong rates, and the unemployment rate was 3.5% as of the end of February.  Retail sales also grew in January and February, posting positive returns from year-ago levels.  There is very little evidence thus far to suggest a severe recession.

With all that said, there is no question that some amount of production will be affected by the virus.  That is not an abnormal occurrence during flu seasons in general, when normal illness keeps some number of workers home and thus decreases overall productivity a bit.  That will be the case this year, and it is likely to be more pronounced than many previous flu seasons.

Decreases in production tend to affect inventory levels; inventories decrease as sellers draw down the stock on hand, and then they build back up when sellers need to restock what they’ve sold.  As long as demand remains strong, sellers need to replenish what was sold in order to continue servicing their customers.

This is the reason we believe that whatever slow-down occurs in the second quarter will be offset by a rebound in the third and fourth quarters.  We are already seeing shifts in global supply chains with production being moved out of China back to the U.S. or to other countries in order to secure better supply diversification.  As of this writing, we would peg growth in the second half of the year to come in around 3.5% to 4%, and we do not believe that economic dislocation in China will compromise that.

None of this mitigates our concern for those who are facing this virus in their own families.  Nobody knows how long this flu season will last or how long the Coronavirus will be with us.  What we do know – a truth we can cling to – is that neither the flu or the CoronaVirus will cause economic ruin, nor a severe recession.  One way or the other, we believe the CoronaVirus will be viewed in hindsight as a point on the enclosed graph just as all the other name-worthy illnesses now appear.

The best advice we can give is to stay the course and take common sense precautions when in public settings.

Understanding Annuities

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