The latest headlines surrounding the COVID-19 virus have highlighted a growing number of infections outside of China. Over the weekend, South Korea, Italy, and Iran each reported a spike in the number of cases, increasing fear among market participants that this may escalate into a pandemic that causes a material drag on the global economy.
So far, the economic impact in China has been significant. Car sales have fallen 92%, air travel in Beijing is down over 80%, and VC investor funding for Chinese start-ups decreased by 60%. However, what makes this epidemic particularly concerning is that it comes at a time when the global economy is already in a fragile state.
Economic growth in Japan was contracting and German GDP was nearly zero prior to the emergence of COVID-19. Subsequently, Japan’s economy has contracted further and Deutsche Bank—Germany’s largest bank—is now forecasting a recession in Germany.
Furthermore, the US economy has not been immune to this contagion. Last Friday, the preliminary forecast for the Markit Services PMI showed that the US Services industry contracted in February. Another similar economic indicator, the ISM Non-Manufacturing PMI, will be disclosed on March 4, 2020. This data could confirm a contraction of the US service economy, which has not occurred since 2009.
Late-cycle phenomena such as fifty-year lows in unemployment, an inverted yield curve, and high valuations create a window of vulnerability where exogenous shocks like COVID-19 have the potential to push economies into recession. Bad news matters more when growth is slowing than when it is accelerating, and global growth has been slowing for the better part of the past two years.
In the absence of data indicating that a sustained economic reacceleration is likely, we continue to generally recommend remaining defensively positioned by being overweight long-term government bonds, gold, and equity sectors like REITs and utilities. These assets have outperformed broad equities since the US economy began to slow in 4Q18, and they have performed particularly well during the past week as volatility has increased, helping to preserve capital in portfolios.
As always, we’re happy to discuss our process and how particular events influence your portfolio. If you have any questions, please do not hesitate to call us.
DISCLAIMERS: The information and statements provided in this communication are not intended to provide investment advice. While taken from sources deemed to be accurate and reliable, GM Advisory Group (“GMAG”) makes no representations concerning the accuracy of the information provided herein or its appropriateness for this or any given situation. Statements regarding future events are not guarantees or projections of performance; should not be relied upon; are subject to change due to a variety of factors, including fluctuating market conditions; and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially, and no assurance is given that these statements are now or will prove to be accurate or complete in any way. GMAG shall not be responsible for the consequences of reliance upon any statements contained herein and expressly disclaim any liability, including incidental or consequential damages, arising from any errors or omissions.
The information and statements provided herein are not intended to provide personal investment advice and do not take into account the specific investment objectives, financial situation, and particular needs of any specific investor. References to any specific securities do not constitute an offer to buy or sell securities.
Target exposures may differ between clients based upon their investment objectives, financial situations, and risk tolerances. Investments in general involve numerous risks, including, among others, market risk, default risk, and liquidity risk. No security or financial instrument is suitable for all investors. Securities and other financial instruments discussed in this commentary are not insured by the Federal Deposit Insurance Corporation, or FDIC. Income and market values of the securities may fluctuate, and, in some cases, investors may lose their entire principal investment. Past performance is not indicative of future results.
There is no guarantee that the information provided herein will be valid beyond the date of this communication. Certain information included in this communication is based on third-party sources, and although it is believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. This information is highly confidential and intended for review by the recipient only. The information should not be disseminated or made available for public use or to any other source without the express written authorization of GMAG. Such distribution is prohibited in any jurisdiction, and dissemination may be unlawful. No part of this material may be reproduced in any form, or referred to in any publication, without the express written permission of GMAG.