ECONOMIC COMMENTARY

Comprehending contagion

As you have heard, there is heightened concern around the spread of the coronavirus in China and beyond, and equity markets have responded negatively to the news over the past several sessions. With the death toll in China rising to a (reported) 81, and 5 confirmed cases here in the United States with no cure currently on the horizon, the concern is certainly justified. However, we want to point out that in previous outbreaks – examples include SARS, MERS, Ebola, Swine Flu, and Avian Flu - the impact to asset markets and the global economy was limited despite similar fears of widespread contagion.

The timing of this particular outbreak is challenging, however, given the backdrop. Coming off of 2019, a year in which equity markets globally posted stellar results, one of the bright spots for continued optimism has been the modest re-acceleration in Chinese economic data. With Phase One of the trade agreement between the U.S. and China now finalized, the backdrop appeared more supportive for a rebound in manufacturing and output in both countries, and in other markets such as the European Union. In addition, consumer spending in China was likely to surge over the past week around the celebration of the Lunar New Year, and travel restrictions will likely impact those numbers. Factor in too the fact that investors are seeing last year’s sizable gains on their recently arrived quarterly statements, and the lofty valuations at which certain companies are trading, and the equity selling we have experienced over the last several days – which has been concentrated in areas like tourism, materials, and manufacturing - is not surprising.

However, the conditions which created enthusiasm coming into January are not necessarily changed. Central bank policy remains accommodative (perhaps to a fault), and the Federal Reserve meeting this week will only enforce that stance. Provided the rate of infection does not grow exponentially in China, much of the country’s manufacturing output should remain on line, and the spending which was to occur in recognition of the New Year is likely to be pushed to a later date, but not disappear completely. Several bellwether companies in the technology and industrials sectors are slated to announce earnings this week, and evidence of improving earnings growth should help to provide some ballast. While the anticipated rotation to more cyclical businesses and towards ex-U.S. equities reflecting better value may slow over the next few weeks, our expectations for improving global growth, a stable to weaker U.S. dollar, and positive returns for U.S., international developed, and emerging markets equities for the year have not changed.

Please feel free to reach out to your SVB Private Advisor with any questions you may have.

Shannon Saccocia serves as Chief Investment Officer at SVB Private, and is responsible for setting the overall investment strategy for the firm. She oversees the asset allocation, research, portfolio management, external manager search and selection, portfolio implementation, trading, and investment risk management functions.

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