First we faced SARS, then the Ebola scare, and over the past weeks the coronavirus has sent shockwaves across the globe, with its daily rising infections rates and death toll. In attempts to contain the virus, flights to and from China are being cancelled, and people are being quarantined. It’s unclear still how big the threat is, and what the impact will be on the Chinese economy and, by extension, on the global economy since China plays a big role in global manufacturing and supply chains.
The main question for investors is this: Will the coronavirus derail the longest bull market in US history?
To answer this question, the mainstream media draw parallels to SARS, Ebola, and the avian flu, saying that those viruses had little impact on the stock markets, and markets have always seemed to bounce back from the impact of deadly viral outbreaks.
The most prominent comparison is how SARS, a virus related to the corona virus, impacted the markets. Let’s take a close look.
The SARS virus spread in 2003 and had an insignificant impact on the markets. At the time, we had a nearly 50% drop in asset prices, which started at the dot.com bubble and turned into a recession, so most of the risk had already been extracted from economic growth and asset prices.
However, the economic environment and the stock market position today is quite different.
Where asset prices in 2003 had bottomed out—and SARS brought them back to their pre-existing bottom—stocks are at historic highs today. They are joined by joyful investor sentiment and market optimism. Below is a chart that shows how investors are allocated to the market based on their fear and greed.
In addition, China, the “ground zero” for the outbreak of the coronavirus, is economically significantly more important today than in 2003.
China plays a central role in many supply chains for companies across the world—for instance, 13% of facilities that make ingredients for US drugs are located in China. Any bump in the road for the Chinese economy will have a larger impact on the rest of the world than during SARS and other past crises. And the US economy is already experiencing deteriorating exports to China due to the trade war, so any decrease in Chinese demand will further impact exports. It will also be difficult for China to uphold its end of the trade deal, which requires China to meet certain purchase targets of US products.
Several US companies are already reporting on the impact of the virus on their business. For instance, Expedia estimates a $30 million to $40 million impact in the first quarter. Flight carriers and cruise lines are also going to be impacted due to cancelled flights and cruises. In Europe, the virus is already impacting economic growth, and according to Ángel Talavera, an economist at Oxford Economics, “the crisis risks delivering a substantial blow to the battered industrial sector.”
It’s unclear how much worse the outbreak will become. Should the outbreak extend well into the summer, the impact on trade and tourism could be severely damaging to the world’s second-largest economy, and it would spread to the US and other economies as well.
With the US markets overly extended and extremely bullish, and with market fundamentals strained, there is a vast difference between today and when SARS broke out. We are facing a higher risk that the impact of the coronavirus could trigger a financial crisis and collapse the markets.
But I’m not worried. During my professional career, I have helped my clients protect their savings from recessions, I have turned financial crises into huge gains for my clients by investing in gold and other precious metals.
Are you convinced your retirement savings are safe from the impact the coronavirus could have on the stock market and the US economy?
Then, schedule a free consultation with me—you can reach me directly at 818-641-1346. I will show you how your portfolio can grow and be protected in all market conditions.
About Kevin Troy
Kevin has spent over 16 years in the financial industry, focused primarily on precious metals as investment assets. He has published many articles on buying and selling precious metals along with the best entry and exit strategies for various financial assets. He has helped thousands of clients protect, preserve, and safeguard their investments with precious metals and has been with Gold Alliance for more than two years as a leading Sr. Portfolio Manager, overseeing a large portion of our clients’ portfolios.