By Morgan Christen
CFA, CFP, CDFA, MBA, CEO and CIO
The market finally found something to cause it concern. Potential market distractions have come calling in the form of the Mueller report, Iran, tariffs etc., but markets marched on. Risk called, but investors never seemed to answer.
Coronavirus finally gave markets reason to pause, breaking the calm that has set in since last October. Hello Monday, January 27th. With over 300 confirmed deaths, over 17,000 infected and 56 million people in China under lockdown, this could shift the thinking in international economic growth.
The Chinese Lunar New Year kicked off on January the 25th, but there was not much to celebrate as coronavirus overtook the revelry. It has been reported that last year, Chinese consumers spent $148 billion on retail and food as well as $74 billion on domestic travel. Their economy could suffer as commerce slows and dissent arises over the slow initial response.
This year started with most analysts believing international markets had stabilized and improved over 2019. The World Bank published their global growth forecasts and have prognosticated a 2.5% growth rate for 2020. That is slightly above the 2019 number, but below 2017 and 2018. The data is showing leading economic indicator numbers that are just above the threshold that would portend a recession.
The ten-year Treasury was in a tight band until the 18th of January, when rates started to fall. The Fed has stated they have put rate changes on hold for now. Should the stock market slide, that could force their hand to lower rates further.
The Conference Board’s Consumer Confidence Index (CCI) increased 3.4 points to 131.6, which was above consensus. The CCI survey is compiled each month through surveying random US households. The questions are derived from two areas: Present Situation Index and Expectations Index. Moves of 5% or more can often indicate a change in the economy.
Ultimately, the current reading says the consumer is happy, and when we are happy, we spend. As we have discussed in prior notes, US Gross Domestic Product numbers are driven by the consumer as they are roughly two-thirds of the calculation.
The Coronavirus adds a new wrinkle to the economy and the markets. There is speculation the infection rate is dramatically under-reported. Could this become a pandemic? Who knows, most likely not, but it can’t be ruled out. To put it in perspective: In 2003, China was less than transparent with SARS. From the start of the SARS outbreak to containment, the S&P 500 was up more than 10%. Coronavirus could be worse, but that is yet to be seen.
We are glad that we made the changes we did in our client accounts. Looking at quality names in both bonds and stocks, taking risk off the table. We hope these moves will continue to pay dividends as investors are now accepting calls from the other side.