Cardan Capital Partners examines in a monthly series different indicators we believe are relevant to the current environment. Indicators can inform our understanding of the economy and investment strategy. For example, economic indicators can help explain the stage of a particular economic cycle, market indicators can help explain how the market is behaving, and sentiment indicators can shed light on how investors are feeling.
Wall Street is trying to project potential impacts of the coronavirus that originated in Wuhan, China, and, as of today, reportedly is believed to have infected more than 28,000 people across 25 countries, causing more than 500 deaths.
At this point, the coronavirus obviously needs to be tracked and contained as quickly as possible. The markets also appear to sense this, and have reacted in a manner reminiscent of the SARS scare in 2002-03. Just as nearly two decades ago, the equity and commodities markets experienced an initial selloff as investors assessed the coronavirus’ potential impacts and prospects for recovery. It is unlikely the bond market’s recent bearish behavior is only coronavirus induced — especially given recent, weak manufacturing data. However, the bond market, which was inverted last year and re-flattening more recently, is now seeing shorter maturities begin to re-invert as this new health crisis unfolds.
Despite these market reactions, we’re not also observing a quantifiable economic impact yet. We’re simply keeping a watchful eye on this situation, especially because direct comparisons to the SARS epidemic are probably not quite right. It appears the coronavirus actually could cause more risks for several reasons, including:
- Since 2002-03, the Chinese economy is more open, and the Chinese people travel more freely, thus increasing risk of infection worldwide.
- The Chinese economy is now more intertwined globally and is 10 times bigger than in 2003 — which poses a larger threat to the financial system.
- While this virus appears less deadly, stretched equity valuations could make the market more vulnerable.
When economic shocks occur, such as a potential pandemic, the outcomes are not immediately clear or reflected in the data. It is likely best to allow this situation to develop before taking any outsized actions.
