• The massive selloff in stocks last week could mean investors are in for a prolonged, painful bout of both upside and downside volatility.
• The downside economic and market risks related to the coronavirus are rising, but we still don’t believe the U.S. is heading for a recession.
• While last week’s selloff may have been an overreaction, and stocks are more attractively valued now, it’s too early to call a market bottom.

Stocks sold off sharply last week, driven by growing fears over the coronavirus. The S&P 500 fell 11%, suffering its worst weekly decline since October 2008.1 Stocks are now 13% below their February all-time high, after being down as much as 16% from that mark early on Friday.1This decline marks the fastest 10%+ correction in U.S. history.1 Given that stocks were looking overvalued and overbought in early February, the markets’ decline isn’t surprising. But the speed and scope certainly is.

The Chinese Economy Remains Key To The Global Outlook
The coronavirus outbreak coincided with firming of previously weak global manufacturing and trade levels. Now, the economic outlook is highly uncertain as business closures, quarantines and travel restrictions are spreading. A race is on between how quickly the Chinese economy can restart and how soon global supply chains will be disrupted, affecting the U.S., Europe and other markets.

While new coronavirus cases in China are slowing, and China is starting to reopen parts of its economy, the macro shocks will likely continue. Chinese officials now forecast economic growth of around 5% for the first quarter, down from previously announced forecasts of 6%. Those numbers seem too high, and we could possibly see negative growth levels in China for the first quarter. The big questions are how quickly China can recover to its decent pace of growth at the start of the year and how much the rest of the world will be affected.

The U.S. Economy Will Take A Hit, But A Recession Still Looks Unlikely
U.S. economic data over the past couple of weeks remained solid, but that will be the last data that doesn’t reflect the impact of the coronavirus. Ultimately fear, panic and virus countermeasures will determine the scope and length of economic damage. The downside risk is the scope of the crisis is very difficult to predict and cannot be managed by changes in political, fiscal or monetary policy. The upside is that coronavirus economic damage is not likely to be a long-term recurring economic risk like a rise in tariffs or mounting protectionism.

In a worst-case scenario of a prolonged global pandemic marked by massive school and business closures, widespread quarantines and growing travel bans, we would almost certainly expect to see the U.S. and world enter a recession. Investors, consumers and business will be prone to increased panic as the virus hits closer to home. However, these effects are also likely to be relatively brief no matter how severe. Because the U.S. economy has strong underlying fundamentals (especially in the consumer sector), we don’t believe a true recession or prolonged bear market will occur, but acknowledge that downside risks are extremely high.

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