February 2020 Economic Update

February 2020 Economic Update

In our last update in early January, we talked about the potential for good growth in 2020 but with a possible ‘rockier road ahead.’ I certainly did not anticipate the significant new virus threatening a global epidemic, but these are the types of things that cannot be predicted and do happen. The Coronavirus could be the catalyst for a correction to the downside from the record highs we have been experiencing in the equity markets and may open some opportunities for investing in quality companies.

• Coronovirus economic impact

• Brexit

• State of the U.S. Economy

• Conclusion

Coronavirus Economic Impact:

So, there is a deadly virus that has started in Wuhan China similar to the SARS outbreak several years ago. The number of those infected has exceeded that of the SARS outbreak by a wide margin, with 17,000 cased reported and over 360 deaths in China. Once again, this is an animal virus that has spread to humans and this time it is contagious for as long as 14 days and can be airborne. Additionally, the virus is so small that the surgical masks often worn to protect against it are of little use. These events have slowed commerce as many are reluctant to board planes and others are in areas where there is a complete travel ban. The general fear caused by the virus is also impacting sales of non-necessities and has even negatively impacted real estate sales in areas such as the state of Hawaii. The timing was perfectly bad as the virus began to spread more quickly during the Chinese New Year, which is when much spending for the year often takes place. Travel declines, supply chain disruption, a weakened Chinese Yuan, luxury goods, and real estate have already taken hits due to the outbreak. The impact will likely begin to spread into spending in other areas as it works its way through the economic system. The virus also showed up in New York on Friday, which was the main cause for a significant sell-off in the U.S. markets.

We have little doubt that the virus will impact first-quarter numbers negatively as all three U.S. airlines and British Airways have halted flights to mainland China with only one United flight going in and out of Hong Kong. Restaurant chains have closed, IKEA and Apple have shut their stores, manufacturing plants are shuttered, Singapore has closed its borders, and here in the U.S., we have partially shut ours as well. The disruptions in the supply chain are real and the consequences will be felt. Both the U.S. and China have injected liquidity over the weekend, but this would seem to be a proverbial band-aid.

Brexit

It is finally happening! Countless delays and many leaders lay by the side of the path to finally accomplishing BREXIT, but it is finally here and with it fears and rumors of horrible consequences. We think these fears are overblown and welcome an end to the many years of political infighting. We are hopeful that this will possibly pave the way to forward progress in the years to come.

State of the U.S. Economy

Despite the latest issues around the world, much of the U.S. economy continues to roll along quite well. Homeownership rates have risen to their highest in six years, which could be a double-edged sword as we also saw a slowdown in single-family home sales. This could indicate that those who can and want to purchase at these historically low mortgage rates may have already done so. This exhaustion of supply is also shown as the numbers for mortgage refinancing have fallen. Earnings have remained robust despite some worry early on and we still have more to go. Manufacturing continues to slow as the tariffs remain in place despite the recent phase one trade deal. We also expect overall commerce to slow a bit given the issues caused by the Coronavirus discussed above. However, the American consumer continues to do well with employment numbers strong and increasing wages at lower-income levels. In turn, these individuals tend to spend more of their income, which supports a healthy economy. Earnings season continues to roll on and so far, reports have been strong overall.

Conclusion:

The most recent polls indicate that investor sentiment is lower than average and that is generally not when we see significant pullbacks in the market. When investor sentiment is at its highest is when I get the most worried. Earnings continue to march higher and the general look of the overall economic numbers would indicate the economy is currently still humming along fine. The factors working against the markets are the Coronavirus and a slowdown in manufacturing. Manufacturing numbers have declined with the ISM remaining under 50 for two months and the new trade deal kept most tariffs in place. The good news here is that manufacturing is no longer a significant enough portion of the U.S. economy to significantly pull-down U.S. Gross Domestic Product after only two months of downward movement. We maintain our longer-term outlook that the stock market should remain on track for a healthy gain for the next 12 to 18 months despite what may be a bumpier ride with the Coronavirus and as the election talk ramps up. A 10% correction in the overall market may be a healthy thing for the markets at this juncture.

These are times when investors following a consistent plan thrive and those who do not follow a strategy are most vulnerable. It is also a time when those investing strictly in an index are most at risk to the overall market’s emotional ebbs and flows. We are always here to speak with anyone looking to make sure they are positioned well with a solid plan for their future regardless of what happens in the markets.