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When China Sneezes…


There is a saying in global economics, that “When China Sneezes, the World Catches a Cold”, and it seems from all indications over the past few weeks, China is dealing with something much more serious than just a bad cold.

According to information from the Johns Hopkins website, the Corona Virus (COVID-19) is an infectious respiratory illness that can cause fever, body aches, fatigue and in rare cases even death. It presents very similar symptoms to the traditional flu we are all most likely familiar with, but is caused by a different virus, and may also be spread through an airborne route as well as person to person.

As of the date of this writing, there are approximately 81,000 reported cases worldwide (with the majority in China) and 57 cases currently in the U.S. Over 30,000 people have recovered from the illness, and there have been over 2,700 reported deaths (again nearly all in China so far). To put this in context, the traditional varieties of the flu virus infect about 1 billion people worldwide every year, and between 300,000 to 600,000 deaths are caused from it each year (12,000 to 60,000 deaths in the U.S. each year).

So, based upon these facts, at present, it would seem reasonable to assume it isn’t the primary effect of the illness caused by the Corona Virus that is necessarily causing the significant increase in volatility and negative impact on the investment markets. It’s the follow-on negative impact to global growth estimates for this year (and maybe even into next year) the actions being taken by global governments (especially China at this point) to contain the spread of the virus that has been the chief culprit.

The virus has come at an especially critical juncture for already weakened global growth, and has sprouted from an economy that has historically been a leading driver of that global growth. There are varying estimates, but the combined impact of manufacturing in various industries, travel by Chinese abroad and consumption in China currently accounts for approximately 18% of total annual global activity. With nearly 100 million people under quarantine at one point, numerous industrial areas completely closed off, and schools in some parts of the country not set to re-open for several more weeks, the negative impact of these actions have already started to show up in individual company profit warnings and will likely continue to be felt across the globe for weeks, if not months.

So, what does this mean for us, as investors?

As of this writing, the broad markets have seen a decline of between 8% (S&P 500) and 10% (Nasdaq) just within the last week. Looking at the longer term perspective, these are considered to be typical corrections within a longer term up trend. In fact, pullbacks of this type usually occur several times in a year during a bull market advance. It may seem more alarming to us now though because it has happened in such a short time frame, been accompanied by negative headlines about the virus, and come after a period of time when the market seemed to be destined to only go higher every day.

In my opinion, what we are seeing is a usual correction. For our clients in general this means we won’t be doing anything in the portfolios we normally wouldn’t have done in any similar pullback. This means using the opportunity to re-allocate any overweight allocation to equities, reduce allocation to any high valuation positions transferred into accounts, and judiciously look for opportunities to buy well run businesses at attractive valuations.

However, if the Corona Virus impact here in the U.S. should begin to negatively influence the level of activity by consumers (which account for nearly 70% of our economic growth) or we see indications of similar restrictive actions being taken by the government to control the spread of the illness, then the odds of a recession would increase, and we would out of necessity become more cautious and look for opportunities to reduce the overall equity allocation in most client accounts.

But at this time, that is not our expectation.

We hope this short note has helped you understand our views on this important topic, but as always, we are available to answer any questions you might have or address any concerns either by email or phone.

About the Author

Randy has more than 15 years of experience managing financial assets for individuals, retirement plans and businesses. Randy joined YHB | Wealth Advisors in January of 2018 and serves as the Director of Wealth Management. Prior to entering the professional wealth management field, he enjoyed building entrepreneurial business ventures from start-up to eventual sale and providing accounting services for public and private firms.

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