by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets retreated from their previous highs last week as evidence emerged that the new coronavirus continued to spread outside of mainland China. About a dozen Chinese cities, including Wuhan at the center of the outbreak, are on lockdown as China’s Lunar New Year celebrations begin. Many public celebrations have been canceled and travel restrictions have been imposed during what is one of China’s busiest holiday seasons. Markets are reflecting concerns over the potential impacts of the virus on the global economy, and we have begun to observe a rotation out of risk assets such as stocks and toward the relative safety of fixed income investments. As a result of this rotation, yields moved lower across most of the yield curve last week, generating positive returns for bonds.

The true economic impact of the coronavirus will not be measurable until after the outbreak has been contained, but many have looked to the SARS outbreak of late 2002 and 2003 for a point of reference. A report issued in 2004 estimated that the SARS outbreak cost the world economy over $40 billion dollars, but the overall market impact proved to be somewhat limited. The major risk to markets at this point in time still stems from the “fear factor” that the new virus is creating, which may ultimately pose a risk to consumer spending and travel expenditures. Adding to the uncertainty is the fact that the virus has an unusually long incubation period of up to two weeks, which makes it likely that current reports are underestimating the number of infected people. However, it is important to note that even if the disease continues to spread, its impacts may still be significantly lower than that of the seasonal flu, which kills an estimated 50,000 people every year. The heightened level of concern surrounding the new coronavirus is likely at least in part due to the simple fact that it is new and foreign. It is human nature for us to have a heightened sense of fear of something that we do not understand and are unfamiliar with.

We have adjusted our assessment of “geopolitical risks” in our heat map to a negative at this point in time to reflect the heightened concerns surrounding the novel virus, but do not believe that the effects will be long-lasting. We will continue to monitor the disease’s impact on the global economy and markets moving forward and will provide additional updates in future commentary.