Investors started the week off witnessing the sharpest decline in the equity markets so far this year. The S&P 500 closed the day down -3.4%, erasing all of its gains for the year and its largest loss since February 2018. Markets were reacting to news over the weekend that there have been significant outbreaks of Coronavirus in Italy, South Korea, and Iran; and concern that if the virus continues to spread there could be significant impacts on global economic growth.
The start of the year has been fairly volatile due to concerns around the Coronavirus, but much of the concern was concentrated on the impact of Chinese economic growth and supply chain concerns for companies that do business in China. This concern was highlighted last week when Apple cut their sales outlook due to the unexpected shifts in China stemming from the Coronavirus, causing both supply and demand issues for the company. While unwelcome, the risk that Coronavirus posed appeared to have been focused within China.
Now that the Coronavirus has seen more significant outbreaks spread outside of China, the concerns around its impact on global growth have spread as well.
Source: Johns Hopkins CSSE Data as of 2/25/2020, 8:03:06 AM PDT
It was reported over the weekend that outbreaks were reported in Italy, South Korea, and Iran. Italy is the first major outbreak reported in Europe which led Italian authorities to lockdown 50,000 residents across 10 towns for the next 2 weeks and anyone wanting to leave would need to be granted special permission. Most of the reported cases in Italy were close to Milan, the financial center of Italy. Concerns here draw from the idea that western countries were at lower risk of an outbreak; and given the level of interconnectivity in Europe, an outbreak in Italy could lead to outbreaks popping up in other European countries.
In South Korea, over 700 cases and 6 deaths were reported as of the end of the weekend, making South Korea the largest number of cases outside of China. Because of the outbreak there, Israel has suspended travel for any non-resident that has visited South Korea or Japan recently. South Korea and Japan play key roles in export markets and within the global supply chain; outbreaks in those countries and the measures used to limit them could influence global economic growth.
Lastly, Iran has reported 43 cases and 6 deaths, though there are concerns that Iran may be concealing some of their cases as the fatality rate of Coronavirus is about 1 in every 50 cases. In response, Iran has canceled any large-scale gatherings; while Pakistan, Turkey, and Afghanistan have closed their borders to Iran or limited travel in some fashion.
While the increase in reported Coronavirus cases and its potential impact on global growth is concerning, the market’s reaction on Monday might have been driven more by emotion than fundamentals. As markets take a risk-off view and move into safe-haven assets, it is important to invest based on fundamentals and not on emotion. While it is likely that the Coronavirus will increase market volatility in the short and intermediate-term, now may be a good time to review your portfolio to make sure you are properly allocated to weather that volatility. For more information on coping with market volatility, please check out the resources below. If you have any other questions, contact our financial wellness center today.
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