Just a month into 2020 and investor’s resilience continues to be tested. Kicking off the New Year, investors faced the killing of a top Iranian general by the U.S. Thankfully, de-escalation was quick. The biggest challenge, which remains ongoing, was the coronavirus outbreak in China that brought nearly a fifth of its economy to a halt after extreme lockdown measures were implemented. Many pundits have pointed to the market weakness around the 2002/03 SARS crisis as an analogue to the coronavirus. However, we would note that markets were likely more burdened by the Iraq War while the U.S. economy was showing signs of fatigue in 2002 with a rising unemployment rate. Today’s backdrop is healthier with U.S. growth above trend and a record-low unemployment rate. However, China is a much greater influence to global Gross Domestic Product (GDP) and stocks than it was in 2002. Relying on previous pandemics to plot a potential roadmap for investors may therefore prove of little use to investors.
For China, the virus outbreak delays the tailwind of Phase One and will likely lead to very poor Q1 economic data. But what matters most for investors is that episodes of pandemic fear tend to have short-lived economic and market impact, unlike the more powerful forces of fiscal and monetary policy, which will remain a tailwind in 2020. For long-term investors, the challenge is to avoid distractions from this unpredictable noise. For us, this means a close monitoring of our core thesis of gradually improving fundamentals and earnings re-acceleration in 2020. We expect a short-lived impact and believe a global pandemic will be avoided, but we are closely watching the outbreak.
We note some key developments supporting our bullish base case. First, the U.K. finally left the European Union while the Canada-United States-Mexico Agreement (CUSMA) moved a step closer to ratification. U.S. Q4 real GDP growth surprised to the upside at 2.1%, whereas U.S. earnings came in about 2% better than expected along with positive guidance.