THE CONTAGION EQUATION

The corona virus has created a great deal of market volatility. Daily news always moves markets, and this is one of the more significant recent news items. Markets often overreact to both good and bad news, only to see those moves reversed as more rational thoughts prevail. Like a virus, fear and greed are often contagious, but turn out to be speed bumps with little enduring financial impact. They trigger uneasy emotions, which in turn drive us to want to react. Our best defense against a contagion of emotion is an inoculation of the underlying facts. So let's see where we stand.

First, let's look at our overall economic health. Are we a susceptible patient or in good shape? Looking at all the data I would say we are in about average shape. On the positive side we see unemployment numbers at one the lowest levels in our lives and decent consumer confidence. On the other hand, we see signs that corporations are struggling to gain ground. Although they keep hiring more workers, their profits have barely budged, actually showing slight declines for the first three quarters of 2019. We also see a similar struggle in our economic growth as measured by gross domestic product. While our economy is still growing, forward momentum continues to decline. Our growth rate has slowed from about 3% in 2018 to about 2% at the end of 2019.

Second, let's look at the potential impact of the corona virus. Nobody knows the speed or breadth of the viruses spread so projections are certainly subject to error. With that said, as of 2/22/20 the International Monetary Fund (IMF) estimates the virus will lead to a 0.1% drop in overall global growth this year with a drop in China's growth from 6% to 5.6%. Focusing back home, what percent of U.S. corporate sales comes from China? According to the MSCI USA index (which accounts for about 85% of U.S stock market capitalization) China represents about 5.7% of sales. Assuming a decline in China related sales of about 20% that equals a fairly small 1.1% drop in overall revenue (5.7% x 20% = 1.1%). There will also be other indirect impacts from the virus including disruptions in the supply chain for companies that make or buy parts or products from China. It's too early in the game to get a handle on those effects.

I suggest investors remain focusing on our overall economic health which remains about average, and unlikely to take a significant hit from virus related factors. With that backdrop investors need to maintain a balanced investment approach with a wait and see perspective. Inoculate your portfolio against emotions. Let the data do the driving. Timing and reacting to the viruses short term impact on the stock market may lead to overall poor portfolio health.

Frank Rizzo, Certified Financial Planner, CRC

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is not guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.