01/28/2020
Worries about the economic impact of the coronavirus caught up with global equity markets last week. Last Thursday, China’s Shanghai Composite index fell by 2.8 percent and the Shenzhen Composite shed 3.5 percent, before both subsequently closed for the Lunar New Year holiday. But some of that same fear shifted to the U.S. on Friday, as the S&P 500® index dropped 0.9 percent. As this week gets underway, the Japanese Nikkei index has fallen 2.0 percent, stocks in Europe are down in excess of 2.0 percent with several hours to go in the trading session, and U.S. futures are pointing to a sharply lower open. Futures on the FTSE China A50 index are down 5.7 percent in Monday trading. 

Meanwhile, the coronavirus continues to spread. The official death toll now totals 80, with 2,744 confirmed cases, a 30 percent increase in 24 hours. There are confirmed cases of the virus now in more than 10 countries. The Chinese government has taken measures to contain the spread of the virus, but how effective they will be remains to be seen. The New Year holiday has been extended several days, and many celebrations have been cancelled. Travel is restricted, especially in Hubei province, where the city of Wuhan is virtually quarantined. Five confirmed cases have been reported in the U.S. 

It is too soon to quantify the ultimate impact of the virus on the Chinese economy. That will depend upon how quickly the virus can be brought under control. But clearly, certain sectors will be particularly hard hit, including travel, tourism, restaurants and other leisure activities, as we saw in previous public health emergencies in China, including the SARS outbreak in 2002-2003. In the second quarter of 2003, year-over-year GDP growth in China fell from 11.1 to 9.1 percent. However, from there it began to rebound, rising to 11.6 percent by the middle of 2004. 

Investors Look to Bonds Amid the Selloff in Stocks 

As stocks are being shed, investors are turning to the perceived safe havens of bonds. In the past three days, the yield on the ten-year Treasury note has dropped from 1.77 to 1.63 percent. Brent crude oil has fallen $4.32 a barrel to $58.85. Gold has climbed $23 an ounce to $1,582.

If prior episodes of health emergencies are any guide, and assuming the coronavirus will ultimately be contained within a timeframe similar to prior episodes, the negative impact on economic activity and markets is likely to prove to be temporary. Both will recover in time. For the long-term investor that means it is prudent to stay the course despite the near-term negativity. But such fortitude may well be tested in the near-term. Inasmuch as the coronavirus continues to spread, with no available vaccine, the fear and uncertainty it is causing are likely to intensify in the near-term.
 
Corporate Earnings and a Federal Reserve Meeting Remain Top of Mind
 
While the virus remains the preoccupation of investors, there is other important fundamental news ahead this week. It is a big week for corporate earnings, representing a broad cross section of the U.S. economy. Scheduled to report are Apple, Facebook, Microsoft, Amazon, United Technologies, Visa, Pfizer, Pulte, Boeing, UPS, Exxon, Chevron, and Caterpillar. Roughly one-fifth of the S&P 500 index has reported so far, with results modestly exceeding expectations. According to Factset, the blended aggregate earnings growth rate for the quarter is now -1.9 percent, an improvement from last week’s -2.2 percent. 

The Federal Reserve meets this week. And while it is widely expected to take no action on rates, it does present an opportunity to reiterate its outlook, as well as speak to its operations in the repo market. The Fed funds futures market is indicating better than even odds of a rate cut by September, and a 75 percent chance of one by year-end. Also, on the economic calendar this week are new home sales, durable goods orders, consumer confidence, personal income, spending and price inflation.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. 

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. 

The Shenzhen Composite Index is a market-capitalization-weighted index that tracks the performance of all the A-share and B-share lists on the Shenzhen Stock Exchange. 

The Nikkei 225 Index, more commonly called the Nikkei, is a stock market index for the Tokyo Stock Exchange and is calculated on a
price-weighted index basis.

The FTSE China A50 Index is the benchmark for investors to access the China domestic market through A Shares – securities of companies incorporated in mainland China and traded by Chinese and institutional investors under the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (QFII & RQFII) regulation.

It is not possible to invest directly in an index.

Past performance is not a guarantee of future results.

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