Coronavirus, Italy, South Korea, Iran – February 25, 2020

When the coronavirus was contained to China, investors more or less brushed aside concerns – modest volatility, with the S&P 500 Index setting 7 new highs through Feb 19.

With stocks priced for perfection, any event can come along and create tremors.

Over the weekend, the headlines changed – new cases in Italy, South Korea, and Iran. No longer do we have containment in China.

Italy scares people because, “If this spreads through Europe, isn’t a leap across the Atlantic into the U.S. inevitable?” And if so, how does that impact consumer behavior?

South Korea could slow chip production if factories close. And Iran? Unlike Italy and South Korea, Iran’s health infrastructure is lacking.

The 10-year Treasury yield fell to its lowest level since 2016. It suggests economic storm clouds are gathering, even though much of the data has been favorable, including leading economic indicators.

Yet, fed funds futures are pricing in a 23% chance of a March rate cut and over a 50% chance at the April meeting (CME Group).

But let me caution, on days like these such indicators get skewed.

Perspective
The 2011 earthquake and tsunami off the coast of Japan caused a major nuclear accident. It may be the closest event over the last decade to coronavirus – at least for our comparison purposes.

The enormous uncertainty that followed briefly jarred investors, as there were no familiar landmarks to help navigate the crisis. Of course, valuations were lower, and we were at a different point in the economic cycle (however, double-dip recession fears were shifting between the front and back burner in 2011).

I believe (and will go out on a limb and say) fears will eventually subside when the progression of the virus slows. The World Health Organization said the virus has peaked in China. Best guess (and it is a guess because I don’t have a crystal ball), something similar happens in other countries. 

Or, might we simply factor it into our outlook, which we do with the flu every season (CDC: 29-41 million flu illnesses, 16,000-41,000 deaths in the U.S. thru Feb 15)?

In the meantime, expect continued volatility as heightened uncertainty, a lack of familiar landmarks, and the uncertain economic impact keep short-term traders off balance.

As Warren Buffett said on CNBC today, “It is scary stuff. I don’t think it should affect what you do in stocks.”

Created 2020-02-25 22:32:36