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In mid- to late January 2020, the media and investors began to focus their attention on the new coronavirus, now dubbed COVID-19. At first the questions were about how contagious and how deadly this new virus was, and whether health authorities would be able to contain it. So far, it would appear that the mortality rate is about 2% within China, and lower outside of China. A few years ago, we experienced the SARS and MERS outbreaks (both caused by coronaviruses), and they had mortality rates of 10% and 34%, respectively. While we do not take the death of anyone lightly, this new virus seems to be more easily transmitted, but also less lethal than either SARS or MERS. Given the expectation that COVID-19 will be transmitted around the world, it is important to keep this disease in perspective.
Now the discussion has turned to whether or not COVID-19 will cause a global recession. The present thinking is that a decline in production as workers are unable to get to their jobs, coupled with a decline in shipping from Asia, will idle manufacturing across the globe. It is true that we are seeing many factories and entire cities in China essentially closed, but we also expect that, since new reported cases are slowing, we will soon see economic activity resume in China. Overall, we anticipate to see some economic slowdown in the near future, but a fair portion of the reduced activity should be recovered later in the year. Also, for the past few years, companies have been diversifying their supply chains away from China in response to the Trump administration’s tariffs on Chinese imports. We expect this trend toward supplier diversification to continue, if not accelerate.
At the time of this writing, the S&P 500 has fallen more than 6% over a two-day period as economic growth concerns regarding COVID-19 grow. We are not surprised by the pullback overall, but perhaps by the late onset and steepness of the decline. We began 2020 with a forward P/E of just over 18.2x on the S&P 500, above the 25 year average of 16.26x, so a pullback was not unexpected. However, the current forward P/E of 18.18x would not indicate a recession.
On a more positive note, the advances in genomic research were on full display as COVID-19 was researched and sequenced, and a potential vaccine sent to Phase 1 trials in record time. Assuming that the process continues apace and current trials prove successful, we could have a functioning vaccine within 12 to 18 months. In the meantime, existing antiviral therapies are being explored to see if they are also effective against COVID-19. In addition to genomic and other healthcare advances, we could see an acceleration of the use of robotics and other forms of working remotely as ways to address future outbreaks without losing productivity. We could also see China and other nations invest more heavily in their healthcare infrastructure.
Even prior to the emergence of the COVID-19 virus, we expected volatility to be heightened in 2020, primarily due to valuations. Despite COVID-19, we still do not expect a global recession in 2020, but that viewpoint could change as information on the virus changes. If you are finding yourself becoming worried or losing sleep, then a call with your REDW Wealth relationship manager to discuss the volatility or perhaps a change in your allocation might be in order.
Copyright 2020 REDW Wealth, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.
