Market Pulse: Going viral — Coronavirus and its effect on GDP
We are used to hearing that things have “gone viral,” as they say, but this time it’s different.
What is “going viral” is not a funny picture, story, joke or cat video on the internet, it is in fact a virus. Investors don’t really know what to make of it. I can see why.
The coronavirus quickly spread from Wuhan, a city of 11 million that few Americans had even heard of, to countries far and wide.
More than 20,000 have been infected in China. The virus will undermine GDP growth in China and to a lesser degree elsewhere, especially in Asia. People won’t travel. Stores, hotels, theaters, casinos and amusement parks have closed. Airlines have cancelled flights. Energy use will decline. Global growth will slow, for a while.
We’ve been here before with the SARS virus, the Asian flu, the Swine flu and MERS. There were others.
In each case, the worst outcome some forecast didn’t occur and it most likely won’t now. Investors generally understand that, though there is always some knee-jerk selling when something unexpected like this happens, especially after a good run.
The S&P 500 fell more than 2% last Friday, but it’s not far from its recently set all-time high. Most investors are focusing on what matters most, future earnings.
Some people inevitably think that a short-term problem must become a catastrophe (remember Y2K?). But extremes rarely happen, and for good reason. It is always in the interests of the vast majority of people to avoid them and find some middle ground. That is true in different walks of life, in sports, in politics, with investments, and in day-to-day interaction with people and businesses. To assume otherwise, and worse yet to invest accordingly, would be foolish.
That said, the potential impact of this virus on global growth is reason to at least be cautious. Stocks in areas where growth will not be impacted (utilities, health, insurance, pipelines, telecoms, consumer staples) are holding well and some are setting new highs.
Buying the market’s dips has been a rewarding strategy in this bull market since 2009 and it will be again once the headlines about the virus begin to improve. Given easy money policies worldwide, and the likelihood that earnings growth will accelerate once concerns about the virus fade, the stage is set for new highs. S&P earnings this year are expected to be 175-185. Using the midpoint of 180, the Index is trading for 18 times earnings.
Yes, a bit more than normal even for years in which interest rates were low, but not much more. And, as I often say, these are not normal times.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com.
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