Chek the Channels
The Quick Spread of Coronavirus is Impacting Global Economies and Markets
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
The coronavirus, first identified on December 31, has killed 81 people in China and infected more than 2,800 worldwide including five in the United States. Coronavirus is an animal virus that has evolved to infect people. It is constantly adapting and mutating making controlling the outbreak a challenge. It can be spread between people not unlike the Severe Acute Respiratory Syndrome (SARS) or Middle East Respiratory Syndrome (MERS) viruses. Given the rapid escalation of reported infections, the virus has the potential to spread to a point where it has an impact on companies involved in travel, vacation and health care. Further escalation could even impact the economic growth rate of China and its trading partners. World health officials are scrambling to contain the spread of the coronavirus. But are officials prepared to contain the spread of the impact of the virus on the world’s economies?
The economy and corporate earnings are strong. The economy is running near full employment and corporations are reporting strong earnings growth. Inflation has been tame, but there are occasional signs of inflationary pressure. A slowdown in economic activity is never welcomed but would have the positive effect of keeping a lid on a rise in inflation.
The government is considering a second tax reduction. The Trump administration has suggested the possibility of attempting to pass a second tax cut. Such a cut would help spur the economy and offset any global weakness. Passing a tax cut through Congress despite large federal budget deficits becomes more of a possibility under such a scenario.
Protectionism may help protect against the spread of the virus. The United States has taken a more protectionist stance during the Trump administration. This has been especially true with China. While the costs and benefits of such a move can be debated, the decrease in trade with China means fewer people traveling to China perhaps decreasing the rate at which the coronavirus spreads to the United States.
Past epidemics have affected world economies. The Ebola outbreak in 2014 resulted in a 7 percent decline between mid-September to mid-October. The SARS virus (774 deaths) carved more than 1 percent from China’s economic output according to a report by Jong-Wha Lee of Korea University.
The federal budget deficit has increased dramatically and may limit a fiscal or monetary response. The federal budget deficit has crossed $1 trillion in response to tax cuts. This high budget deficit may limit the ability of Congress to provide additional fiscal stimulus and the Federal Reserve to provide additional monetary stimulus.
Interest rates are low limiting further Fed action. The Federal Reserve has been slow to raise interest rates in recent years despite strong economic conditions. With a discount rate of only 2.25%, the Fed is limited in terms of cutting interest rates to counter any economic impact from the virus.
The China economy is already fragile. Economic growth in China has decreased in recent quarters in response to global economic weakness and trade disputes with the United States. Consumer confidence had improved recently in response to an ease of trade tensions. The coronavirus has the potential to offset any positive impact from a détente in the trade war and could even send China into a recession. The virus comes at the worst time possible, the Chinese New Year. Weaker economic conditions in Chinese will, of course, have a negative affect on its trading partners including the United States. The virus most certainly will be a distraction to the country’s agreement to increase spending on U.S. goods and services by $200 billion over the next two years.
Past epidemics have had a significant economic impact but were ultimately controlled. The scary thing about epidemics, however, is that they are unpredictable, and no one can actually forecast the impact of the next virus. The United States has pursued a full growth strategy, which has been great for the economy and stocks but limits its ability to respond to further weakness. At this point, investors should view the coronavirus as a potential concern that needs to be closely monitored.
Photo: Face masks worn for the prevention of the coronavirus at Huai'an East Railway Station during the travel rush ahead of the Chinese New Year in Huai'an City, east China's Jiangsu Province on January 23rd, 2020. By Zhao Qirui
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https://www.barrons.com/articles/travel-stocks-coronavirus-china-airlines-health-care-51579714639, Al Root, Barron’s, January 23, 2020
https://www.cnbc.com/2020/01/24/cdc-confirms-second-us-case-of-coronavirus-chicago-resident-diagnosed.html, Berkeley Lovelace Jr., CNBC, January 24, 2020, January 24, 2020