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Our Take on a Difficult Week in the Markets

Our Take on a Difficult Week in the Markets

March 02, 2020

As of Monday, March 2, 2020, this is our view on the coronavirus, economy and stock market. 

Let’s start with the coronavirus. CNBC1 is reporting there are now at least 6 confirmed deaths in the US with people that had the coronavirus. The Centers for Disease Control and Prevention reported that there are now 91 confirmed or presumed positive cases in the US. Of those cases 48 were people who were evacuated from Wuhan, China, or were on the Diamond Princess cruise ship. Italy now has over 2,000 cases. Other hot spots in the world include South Korea, Iran and Japan. 

Airlines have been cancelling flights to China, Indonesia, South Korea, northern Italy and other areas hit by the virus. The stocks of airlines, cruise lines and other travel companies have been hit hard this week due to the expected impact the virus will have on these companies. Some US companies have cancelled conferences and conventions that require a large gathering of people.

Major US corporations are warning that they expect reduced production levels and reduced sales of services in China due to the virus. Some companies are reporting shortages within their supply chains due to closed factories in China. The big questions are how big will the disruptions be and how long will they continue?

Since it is difficult to know if the data coming out of China is accurate, it is hard to know the current situation. Our clients that work in Bay Area companies with factories in China are reporting that there remains significant disruption and even closed factories at this time in China. Another client with relatives in the Wuhan region of China reports that many people are still being told to stay home to try to avoid spreading the virus further.

Some large US companies have announced this week they will have lower than expected sales and earnings for the first quarter of 2020 as a result of the coronavirus. The result has been a very swift 15% sell off in the stock market the past 2 weeks from the stock market all-time highs on February 19. 

Where do we think things go from here

Over the past 6 months, we have designed well diversified portfolios to help ride through periods of volatility such as this. To prepare for a possible market correction, we have had discussions with clients in recent months about risk tolerance to match clients to accounts with the appropriate amount of risk for them.

So, where do we think things go from here? It is difficult to know for sure. The cases of the coronavirus continue to grow worldwide, but we could see the impact start to lessen in the next one or two months. We are watching to see if the factories in China come back online in the next few weeks or months to start shipping parts again and filling their supply chains. 

More and more companies are reporting that earning will be coming in lower than originally expected when they report Q1 earnings in April and the stock market has come down in anticipation of that. Prior to the outbreak of the coronavirus, the economic outlook for the US for 2020 was positive. So, we remain optimistic that once the virus is under control, when the Chinese factories are back in production and supply chains are getting resupplied, the later part of 2020 could still be relatively positive. 

Regarding the stock market, we had been wondering why the market had gone up as much as it did in late 2019 and early 2020. It seemed to us that the market had gotten a little frothy and higher than made sense.  While the market may have been ready for a pullback, we think the size of the pullback is a little more than is rational. This creates buying opportunities as excellent companies get over sold. We still believe that we could see a recovery by year end.

If you would like to discuss this more with your advisor, give us a call.

Elaine, Scott and Linda