Global Markets React to Coronavirus

February 18, 2020

• Global markets drop on the spread of coronavirus
• Selling could continue as investors look for a reason to sell
• Expect volatility to increase on uncertainty

Global markets moved sharply lower on news that the spread of the 2019-nCoV virus, commonly known as coronavirus, is accelerating. While the impact on human life is at the forefront of everyone’s concerns, the markets are also reacting to the potential impact on the global economy, particularly in China, which is considered the epicenter of the virus outbreak. In particular, economically sensitive commodities such as oil and copper have fallen in unison with global equities, while safe-haven assets such as Treasuries and gold have rallied. While we will continue to watch the fallout of this virus, we do believe that it may have afforded investors a reason to reduce risk, something that has been missing for some time.

According to the Centers for Disease Control and Prevention (CDC), coronaviruses are a large family of viruses that can cause respiratory illnesses such as the common cold. These viruses are common amongst animals worldwide, but only a handful of them are known to affect humans. Although rare, coronaviruses can evolve and spread from animals to humans. This is what happened in the past with the coronaviruses known as the Middle East respiratory syndrome (MERS) and the severe acute respiratory syndrome (SARS). The first cases of the new coronavirus were reported on December 31, 2019. As of today, according to the New York Times, there are more than 2,700 confirmed cases and over 80 deaths.

While the death toll is upsetting and, according to the Washington Post, there are signs that the virus is adapting to humans faster than the SARS virus took, equity markets are lower as investors grapple with the potential global economic impact. The coronavirus outbreak has taken place during the all-important Lunar New Year, which is China’s most important public holiday. Unfortunately, a travel ban in China covering 50 million people and over 16 cities has limited travel and gatherings and impacted spending in the world’s second-largest economy. For example, some Chinese retailers have noted a 50% decline in store traffic. This potential decline in spending, along with measures that the Chinese government has taken to help reduce the spread of the virus, could potentially impact the country’s growth by 1%. This impact on growth is disconcerting as China remains in a delicate spot because of the impact of the U.S.-China trade dispute. Investors could be using the coronavirus news as a reason to take profits.

Although markets are down today, we do not know how long the selling could persist. Looking at the market impact of the SARS virus in 2003, which is considered the most similar to the current coronavirus, you can see in the table below that equities sold off in the first month after China first reported SARS to the World Health Organization and the media. However, by three and six months later, markets had more than recovered. Keep in mind that these results should be taken with a grain of salt as the economy was just recovering from a recession in 2001.

Scientists are still working to understand the effects of the coronavirus. While we do not know how this virus will play out, we do expect, as new information emerges and concerns increase, market volatility to increase as it has been extremely low for several months. It has been 69 trading days since we last saw the S&P 500 move higher or lower by at least 1% (an occurrence that historically takes place one out of every four trading days). In periods of increased volatility, being diversified with a long-term plan is still the best hedge against uncertainty and unease. Your Cetera financial professional can help you ensure your plan, financial objectives, and life circumstances are in alignment and help you, no matter what happens around you, chart a clear path for the future.

This report is created by Cetera Investment Management LLC

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Glossary The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI EAFE is designed to measure large and mid cap equity market performance of 21 developed markets, including three regions (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted, covering 85% of the free float-adjusted market cap in each of the 21 countries. MSCI Emerging Markets is designed to measure large and mid cap equity market performance in global emerging markets. The Index is market-capitalization weighted, covering 85% of the free float-adjusted market cap in each of 24 countries.