Coronavirus Fears Spook Markets

Coronavirus fears hit stocks Friday with the S&P 500 down 1.78% and the Dow down 2.09%. Bond prices surged as investors looked for safety.

The virus is hitting the Chinese economy at a time when slowing growth was already a concern. Investors had previously been hopeful that the phase 1 trade deal with the U.S. would set the stage for stronger Chinese growth in 2020. This is still a possibility, however at this stage no one knows what to expect from the coronavirus in the next few weeks and months.

I will point out that after stock markets surged over the past three months a case could be made that stocks had gotten ahead of themselves and a pullback was necessary to keep excessive optimism from creeping in to the markets. In other words, markets had been looking for a reason for a pullback and the coronavirus gave them that reason.

Global health concerns are not new to markets, in the past we have seen stock declines surrounding outbreaks such as SARS in 2003, swine flu in 2009 and Ebola in 2014. Of course we don't know when news surrounding the coronavirus will improve, but stock declines during past outbreaks turned out to be good buying opportunities as markets were noticeably higher in the three months and six months following the outbreaks.

Earnings & Consumer Confidence

We are in the heart of what has been a good earnings season so far. In fact, this week we have seen excellent results from market leaders like Apple, Amazon and Microsoft. These companies reported strong numbers for the 4th quarter and offered an upbeat outlook for 2020.

In addition to that, U.S. consumer confidence continues to be near ten-year highs, from CNBC:

The University of Michigan’s consumer sentiment index came in at 99.8 for January. Economists polled by Dow Jones expected consumer sentiment to come in at 99.1. The print is also a slight uptick from December’s 99.3 reading. 

“The resilience of consumers is remarkable and due to record low unemployment, record gains in income and wealth, as well as near record lows in inflation and interest rates,” said Richard Curtin, Surveys of Consumers chief economist, in a statement. 

A strong U.S. consumer was a major reason we believed recession fears were way overblown last year when many analysts forecast one would occur. We expect U.S. consumer strength will continue in 2020.

While airlines, cruise operators, gaming and emerging markets have seen sharp declines, the S&P 500 and the Dow Jones Industrial Average are each down less than 4% from recent highs. It would not be a surprise to see markets struggle for a little longer and while pullbacks are never enjoyable, past declines over health concerns have proven to be short-lived. That said, there are still several unknowns related to the coronavirus so we will continue to monitor events as they unfold.