A spike in new coronavirus cases outside of China, especially in Italy and South Korea, has put investors on edge.

Monday’s coronavirus-fueled market sell-off drove global equity markets to their lowest levels since December, with the Dow Jones falling over 1,000 points or 3.56%. The S&P 500 Index, a broader measure of the market, fell over 100 points or 3.35%.

As advisors, we should remember that markets are mechanisms for rapidly digesting large volumes of new information into asset prices. And it’s in times like these, when market volatility increases, that it’s prudent to step back, catch our breath, and evaluate what we know and don’t know. 

The Virus
We know the coronavirus, COVID-19, is a previously unidentified virus. COVID-19 is a respiratory illness that comes from a large family of coronaviruses that typically affect animals; in rare instances, as is suspected with COVID-19, the virus can spread from animals to humans. The virus was first detected in Wuhan, China and has since spread to 25 countries. What we don’t know is how the virus is transmitted, how to cure it or how far it will spread. 

There are currently about 80,000 reported cases of coronavirus globally. To put that in context, the influenza virus infects about 3 to 5 million people globally in any given year. But it’s also highly likely that coronavirus cases are underreported due to a lack of diagnostic capabilities in many countries, or, perhaps, due to bureaucratic incompetence or public relations concerns in authoritarian countries such as China and Iran. We also know that the virus’ mortality rate is approximately 2.5%. This compares to a mortality rate of 9.6% for SARs (2003) and about 10% for influenza in any given year.

Projected Economic Impact
Any attempt to forecast the economic impact of the virus may ultimately prove futile but we likely know enough to make an educated guess. Economists from Deutsche Bank estimate the coronavirus will reduce China’s GDP rate by about 2%, about twice the decline experienced during the SARS pandemic in 2003 (which also originated in China). This doubling of the estimated economic impact of coronavirus (relative to that of SARS) makes sense; China’s economy today is much larger than it was in 2003.

With respect to United States, economists predict the virus will erode GDP growth by about 0.1% in 2020, about 0.03% more than the SARS pandemic did in 2003. Goldman Sachs today reduced its forecast for U.S. GDP growth to an annualized rate of 1.2% in Q1 but predict growth will subsequently return to its current rate of about 2% later this year.

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