Economic Update – March 2020
by Infocus Author
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Coronavirus and US elections disturb markets
– The coronavirus dominates news and economic outlook. Currently causing disruption to communities, economies and markets.
– The Democratic Party primaries have yet not yet identified a clear contender to run against President Trump in the US Presidential election in November.
– US economic data indicates the economy remains healthy, caveat being the coronavirus.
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact our office.
The Big Picture
Only a couple of weeks after the US-China trade tensions settled down, coronavirus (COVID-19) spread across the globe from the city of Wuhan, capital of Hubei province in China.
While we are not experts in medical matters, we must still try and navigate the impact of this virus on economies and markets.
Despite China having seemingly acted swiftly in containing the virus, it has spread to many countries around the world. It has not (yet) been classified as a pandemic (a global epidemic) and various heads of health organisations have said that it is flu-like and would only have a mild impact on most people. However, as with regular flu, the very young and old can have serious reactions and have experienced higher mortality rates.
To put coronavirus in perspective, about 12,000 people died in the US from ‘regular’ flu in 2018 – the latest complete year of data. No vaccine yet exists to combat coronavirus and educated opinion seems to suggest a solution is at least several months away, maybe longer.
Some of the production lost in China might never be recovered but most expect the March 2020 quarter to be impacted with a lesser impact on the June 2020 quarter. For example, the International Monetary Fund (IMF) shaved only 0.1% off its global growth forecast for 2020 but cut China growth from 6.0% to 5.6% for this period.
Besides China, Italy, South Korea, Japan and Iran have been particularly affected and even major sporting and cultural events have been cancelled or conducted without spectators.
So far, the direct impact on Australia has been limited but provisional plans are in place to shut down schools and similar centres if necessary.
While it is always difficult to ascribe precise causes to changes in stock market indexes, it seems reasonable to assume much of the sell-off in late February was due to the spread of the virus. Indeed, the strong changes in the direction of markets within a trading session (so-called intra-daily volatility) seems to be associated with news or rumours occurring in our 24-hour news cycle world.
Had it not been for the coronavirus, the noise created in the US primaries (that Democrats use to choose their candidate for president) would still have created some significant market volatility. There is still a large number of candidates including two on the extreme left of the party: Bernie Sanders and Elizabeth Warren. The larger number of more moderate candidates is splitting their share of the vote helping to make Sanders look like a leading contender – at least until the moderates consolidate their champions.
Although in his late seventies, Sanders is particularly popular with young voters. He is proposing free college education; wiping out existing student debt; decriminalisation of marijuana possession; and even the expunging of previous marijuana criminal charges! On top of that he wants free medical care for all and the outlawing of private health insurance. Of course, he has offered no reasonable costing of his plan nor the means by which he will raise money to pay for it all!
Many of the Democratic candidates are unusual in their ages compared to those of all past presidents. Not only would leading contender, Buttigieg, be the youngest ever elected president, he almost would be younger than Kennedy was even after completing a four-year term! Nixon, at just under 78, was the oldest sitting president after his two 4-year terms ended. Sanders, Biden and Bloomberg would be older than that before they even started their presidencies.
It is popularly suggested that the sitting president (in this case, Trump) is in the box seat if the economy is strong. With the official consumer confidence index read being over 30% higher than before Trump was elected in 2016 and the unemployment rate bouncing around the all-time low since man first walked on the moon, the US economy looks strong enough to be a positive for Trump.
While we do not want to predict who will be elected US president in November, we do believe it will be someone who keeps the economy on track. There are safeguards in place in the US system.
We do not know when the coronavirus issues will dissipate, it has the potential to get worse but at this point we think markets may have recovered within a few months, we just don’t know. With US 10-year and 30-year bond yields falling to record lows, growth assets remain viable investments for the longer term notwithstanding they will be subject to shorter term volatility. We, and most other analysts, do not as yet expect a global, US or Australian recession during 2020 though at this point, negative growth for the March quarter is seen as a likely prospect.
The ASX 200 reached an all-time closing high of 7,163 on February 20th 2020 and then fell sharply into the end of the month. The index was down 8.2% over the month. As we argued in our introduction, we believe the sell-off was largely due to news and rumours about coronavirus and the US election.
At the time of the peak we had the Australian market as only moderately over-priced. It is now cheaper by our metrics but heightened volatility means that it might be prudent hold off on deploying additional capital to equities.
The February Australian company reporting season is all but over. It is hard to judge the full impact of reporting season owing to the heightened volatility. However, our analysis of broker-based forecasts of company dividends and earnings strongly suggests the market was in a stronger fundamental position at the end of February than it was at the beginning. Therefore, we believe the market may continue to improve once the coronavirus situation is resolved and we are in a better position to evaluate the impact of the coronavirus on corporate earnings.