02/28/20
We have discovered that some clients did not receive our client email update sent Tuesday afternoon about the coronavirus impact on the markets. We apologize for this issue and wanted to send a revised update to you with our latest thoughts this morning.
Over the past week, markets became increasingly concerned with the news that total coronavirus cases outside of China significantly increased. Global stock markets are now in correction territory from their recent all-time highs. However, as of yesterday the S&P 500 has still returned 9.1% and 10.2% annualized over the 1-year and 3-year time periods, respectively.
Before the coronavirus outbreak, stock market valuations were elevated as an improvement in 2020 earnings growth was expected. To put the current correction in perspective, all else being equal, the recent decline in the market is pricing in that 100% of the S&P 500 earnings over the next two years will be eliminated due to the coronavirus outbreak. We do not know the trajectory of the virus from here, and there are certainly other factors at play in the world, but this is a fairly dire scenario that is currently being priced into the market.
If the outbreak can be contained this spring, the current expectation is that there would be a subsequent recovery to offset the current economic pain that is expected in the first quarter in China and globally. The most recent leading economic indicators in the U.S. and also manufacturing data outside the U.S. had been improving through January, so it has been the expectation that the coronavirus should only delay what was an improving global economic backdrop. However, if the containment period goes beyond spring, the potential impact on supply chains and earnings is uncertain at this point. Markets are certainly pricing in more bad news at this time. Although many still expect an economic recovery over the next 3-6 months, we acknowledge the situation is fluid. Historically, 10-20% corrections since 1946 have averaged a 13.7% average decline and four months to recovery.
One of the key indicators we are watching is the strength of the U.S. consumer, which has been very resilient the last few years, and the potential impact of the virus on U.S. consumer demand. While we are not recommending any immediate allocation changes, we continue to monitor the trajectory of the virus and economic impact and will update you on our perspective regarding potential allocation changes. If you would like to discuss your specific circumstance further please reach out to us.
Disclosures: The information reflects Homrich Berg’s views, opinions and analyses as of February 28, 2020. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. The information does not represent legal, tax, accounting or investment advice; recipients should consult their respective advisors regarding such matters. Certain of the information herein is based on third party sources believed to be reliable but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
