Aside from politics and the upcoming presidential election, the big news item over the past six weeks has been the emergence of the Coronavirus and its impact on the globe. Another important factor to consider is what financial implications it may have on investments, the market, and your retirement plan. From our research and perspective although there are short term negative reactions to epidemics, ultimately, the health of the global economy and magnitude of monetary & fiscal stimulus dictate the direction of equity markets. In fact, in five prior instances, pandemics were a huge buy signal, dating back to 1997’s Avian Flu.
That said, while returns have been typically excellent coming out of pandemics, 2020 may be “different” because stocks were already rallying into the WHO (World Health Organization) identification.
Source: Bespoke, FS Investments
Is this time different?
Wuhan was a central rail hub during Chinese New Year festivities.
SARS represented a similar drag on the Chinese economy.
Goldman Sachs forecasts a 0.4% drag on US GDP for a quarter and the Street is forecasting a 1.5% hit to Chinese GDP this quarter.
It is too early to tell; however, the path appears similar to SARS and MERS
Sources: Matthews, Bloomberg, Bianco Research
In summary, will the Coronavirus have a major impact on your retirement planning?
Although there are short term negative reactions to epidemics, ultimately, the health of the global economy and magnitude of monetary & fiscal stimulus dictate the direction of equity markets.
Markets have shown a tendency to overestimate the impact on GDP and global growth. Historically, markets and economies have recovered a quarter after the pandemic’s growth rate slows.
In 2003, the Chinese economy only accounted for 4% of world GDP and the US economy was 7.5x larger than China. Today China is 16% of global GDP and the US economy is only 1.5x larger.
China’s economy was on steadier ground in 2003 – unlike today.