Stocks tumbled Friday as fears of an expanding coronavirus epidemic spooked investors. While the number of cases continued to rise over the weekend, the news didn’t widen fears beyond what existed Friday. Thus, futures look tentatively higher, although any gains this morning won’t come close to wiping out Friday’s losses.
I have received quite a few emails suggesting that the coronavirus outbreak is nothing more than a bad flu season in terms of number of cases or deaths. That may or may not be true. The current virus is still in its early stages of spreading worldwide, and one can only speculate at this point how vast its reach might be. But stock prices don’t feed off of the extent of illness; they feed off of the economic consequences. Whole cities in China are virtually shut down and most other big cities are seeing sizable declines in economic activity. China may be many thousands of miles away, but today it is much more than a supplier of cheap tee shirts and shoes. It is a key component producer of many sophisticated goods and parts, and it is a big importer and consumer. China matters. In addition, it is way too early to speculate whether the virus will have an impact around the world even remotely as consequential as it has been in China. While there was little new news over the weekend, it would be foolish to speculate that the worst may be near.
I realize that, over time, we will look back and regard this epidemic as a one-time event that probably won’t hurt long-term economic values. But the story isn’t that simplistic. For the next two quarters at least, the coronavirus will have meaningful impact on the business of many large multi-national companies. While all will use the impact of the virus as an excuse for lower-than-expected earnings, investors will not be able to separate damage related to the virus from economic weakness due to other factors. Confusion is never a good thing. It will take many months to sort out the damage and markets will probably have to deal with the negative impact of the virus for some time. No management is about to say, “we saw a 10% profit decline in the quarter, but it would have been a 20% gain had there been no coronavirus”. It will take at least the rest of the first quarter to really assess both the short-term impact and any longer-term consequences. Until then, it will be an important story line we need to watch. A 3-5% pullback may be appropriate, or it may be the start of a larger, scarier story. All we can do is watch. But I wouldn’t slough off this as just another bad flu-like story. Airlines don’t go into lockdown mode for the flu and quarantine of foreign travelers coming from China is neither normal nor an overreaction.
There is other news to talk about. The impeachment trial, hopefully, will come to an end this week. Regardless of anyone’s political leanings, polls seem to indicate the whole process didn’t change many minds. I am not a lawyer, but it appears to me that a trial consisting of opening arguments, closing arguments and nothing in between isn’t designed to do much more than reach a foregone conclusion as quickly as possible. For anyone frustrated by the whole mess, there is a ballot box waiting in November. Polls show virtually no change in popularity, either for the President or his presumed Democratic opponents over the past several weeks, a further indication that Americans are ready to move on.
President Trump is probably ready to move on as well. Tomorrow evening he will deliver his State of the Union Address, maybe before the impeachment trial concludes. Last year, if you recall, his speech was delayed as the government was shut down. No doubt, Mr. Trump will use the opportunity to discuss the accomplishments of his administration over the past year, including the trade agreement with China and the USMCA pact with Canada and Mexico. Investors, however, will be looking for new agenda items. While he may set the table by suggesting another round of tax cuts or some steps to outline once again how he would view government’s role in providing medical care, it is doubtful that much of what he says has any chance of becoming new law in an election year. Perhaps that is why there has been so little press relating to what is expected in the speech.
Of course, we are still in earnings season. As we saw last week, there have been some pretty big winners, notably Tesla and Amazon. There have also been disappointments. Facebook# comes to mind among companies that reported over the past 7 days. This, of course, is a normal pattern.
With all this said, last week’s GDP report that showed the U.S. economy continues to grow at a shade over 2% should remind us all that virus, tariffs, tax cuts, etc. can all nudge the economy one way or the other, but demographics and productivity will continue to be the dominating factors long term. There is little question, both in the U.S. and worldwide, that demographic trends are slowing the world’s growth rates. As for productivity, technological advances may be a big force in coming years. But over the short term, lack of capital spending is going to be a headwind to growth. Tariffs clearly impacted capital spending. So has the grounding of the 737 Max. The coronavirus may delay some spending. Weak commodity prices, particularly for energy, will contract capital deployed for the search for more oil and gas. For all these reasons, we believe it is unreasonable to expect any sustained escalation of growth rates beyond what we have witnessed for the past decade. The good news is that equity markets can flourish in times of slow growth as long as interest rates and inflation are tame.
Today Amal Clooney is 42. Nathan Lane turns 64.
James M. Meyer, CFA 610-260-2220