Our Broader Economic View as Virus Fear Pushes Markets Into a Correction

Last week’s market activity reinforced why we believe it’s so important to have a well-constructed financial plan that ensures you’re diversified, broadly managing risks and focusing on long-term outcomes — not what’s happening from week to week. No one predicted the 2020 coronavirus outbreak, but a good financial plan assumed something like it was bound to happen. We can’t predict how it all plays out in the days ahead, but your plan is ready for it.

This week, we’ll continue tracking coronavirus developments closely and update as needed, in addition to following the more traditional data we study. Super Tuesday, or the day the greatest number of states hold primary elections and caucuses, is also this week. We think trading around an unknown political outcome runs counter to our focus on long-term horizons, but a clearer picture of who might emerge as the Democratic nominee could bring more clarity to the U.S. policy outlook.

WALL STREET WRAP

How We’re Thinking About the Coronavirus: Stocks fell into correction territory last week (a decline of 10 percent or more from previous highs) as markets gauged the impact of recent coronavirus developments. While it appears to be slowing in China, new cases were confirmed in the U.S. and other parts of the globe, namely in South Korea, Italy and Iran. Fortune 500 companies reduced earnings guidance to account for supply chain disruptions, closures, cancellations and a general slowdown in activity. CEOs and market analysts alike are now trying to assess the economic impact going forward, especially if lockdown quarantine efforts are required in other parts of the world.

There’s a lot of uncertainty out there right now, but we’ve continued to remind that a well-constructed financial plan assumes market shocks like this will happen, not that they might happen. That’s why we emphasize the importance of diversification and working closely with an advisor to pinpoint your goal timelines and risk tolerance. As news continues to swirl in the days ahead, just remember: If you’ve planned, stick to that plan. This is when the expertise of an advisor can shine.

Now, our broader view on the situation, which we published last week, is that the global economy is positioned well to absorb a shock like this. Last week, data from the U.S. Commerce Department showed spending on non-defense capital goods excluding aircraft (a key proxy for business spending) rose 1.1 percent last month — the largest gain since January 2019. But we’ve also seen strength in consumers, housing and small business optimism for months now.

We were on firm footing before the coronavirus outbreak occurred. In addition, fiscal and monetary policymakers around the world are prepared to bolster their respective economies and support businesses and consumers. To be clear, policy maneuvers don’t guarantee a soft landing, but pumping economies full of stimulus has historically helped steady economies during adverse events.

New Home Sales Surprise: The Commerce Department on Wednesday said new homes sales jumped 7.9 percent in January to a 12.5-year high. Analysts were expecting sales to reach 710,000 units, but the tally hit 764,000, with 30.3 percent growth in the Midwest. The housing market has sustained momentum for several months, fueled by historically low mortgage rates resulting from Federal Reserve policies and the bond market. The housing market accounts for roughly 3 percent of GDP, but strength in the sector has positive knock-on effects throughout the broader economy.

Consumer Sentiment Holds Up: Consumers in the U.S. remained relatively upbeat about the economy in the second half of February, with the final reading from the University of Michigan reaching 101 — that’s the second-highest level of the current expansion. People’s expectations for today and the future both rose over the prior month. According to the survey, just 8 percent of consumers in February mentioned the coronavirus when describing their economic outlook.

The coronavirus may drive consumers to slow spending at restaurants, stores, travel and other public activities. But that doesn’t mean they’ll necessarily stop spending. They may just spend differently. Remember, the underlying consumer fundamentals are strong, with debt-to-equity levels near 40-year lows. Interest costs on a mortgage, and debt in general, is historically low.

Fed, and Others, Ready to Act: The Federal Reserve signaled it is ready to cushion the economy against the effects of coronavirus — if needed. “The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy,” Fed Chairman Jerome Powell said in a statement Friday. Congress is in the early stages of assembling a spending package to combat the virus. China has taken measures to aid businesses and ease lending. In Hong Kong, residents 18 and older will receive $1,300 to spend. German policymakers are discussing their own stimulus measures.

China PMIs Shrink: China’s official Purchasing Managers’ Index (PMI) fell to a record low of 35.7 in February from 50.0 in January, according to the National Bureau of Statistics. The headline figure is low, but not surprising. The efforts to contain the virus were a big disruption that kept people home and factories and businesses closed. But on the up side, new cases are decelerating in China and businesses are slowly clicking back into gear as people return to work. Starbucks, for example, has reopened most of its stores China. It may take some time to get the gears spinning at full speed, but it’s encouraging to see they’re starting to spin nonetheless.

THE WEEK AHEAD

A Foggy Outcome Heading into Super Tuesday: Sen. Bernie Sanders emerged as an early frontrunner to represent Democrats in 2020, but Joe Biden’s big victory in South Carolina may have reset the scales. It’s a shift in momentum heading into Super Tuesday, the night when the most states host primaries and caucuses. While our long-term outlook for the economy doesn’t necessarily hinge on who becomes president, election results can yield short-term volatility as the policy outlook becomes clearer.

Other Data: This week we’ll also be digging into a fresh round of manufacturing data and construction spending here in the U.S. We’ll pore through employment figures, as well as the Fed’s beige book to get a little more color on its views about the economy.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.

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