On Monday, Apple was one of the first major U.S. companies to announce that it won’t meet its revenue forecasts for the first quarter due to the coronavirus outbreak. The coronavirus appears to be dominating the news – what has this meant for markets and what do we expect going forward?
We are beginning to see the effects of this outbreak through the data; however, global stimulus through easing central banks has added resiliency to the global economy. We still do not forecast a recession in the next six to 12 months, as epidemics historically have proven to be shorter-term disruptions, and believe this outbreak is another uncertain twist along this 11-year bull market road.
Over the past year, there have been 80 easing moves by central banks around the world, according to Cornerstone Macro. These guardrails implemented by the central banks have helped the global economy to push forward. The People’s Bank of China (PBOC) took steps on Monday to cut its medium-term lending facility, the one-year rate at which it lends to banks, by just 10 basis points – to 3.15% from 3.25%. This cut came shortly after the introduction of the special re-lending facility earlier this month, which allows banks to borrow cheaply from the PBOC on the condition that the money be used to give low interest loans to businesses hurt by the coronavirus outbreak. China is walking the fine line between adding just enough in subsidies, tax cuts and infrastructure spending and being overly aggressive with easing policies that can lead to unwanted side effects like inflation, which could stifle growth.
In the U.S., we have seen a rally in bonds. The 10-year Treasury rate has fallen to about 1.6% from 1.92% at the end of 2019 as uncertainty with the virus leads some investors to safer assets. The Fed has indicated that rates will remain stable and will only consider a further decrease should the coronavirus present a greater threat to the economy.
Stocks continue to make new highs despite coronavirus fears; however, that has not been without some bumpiness along the way. Growth stocks, particularly technology, and low interest rate beneficiaries such as REITs and utilities, are leading the market. Global equities, however, have recovered most or all of their initial falls after the coronavirus outbreak first became a major concern about a month ago. Coming off of a strong 2019 in the equity markets, we anticipate positive but relatively muted returns for the road ahead.
The longer factories in China remain shut down and disrupt global supply chains, the greater the hit to global growth. According to Cornerstone Macro, inventory in the U.S. has about a month left before supply chains could be disrupted. Auto makers have suffered the most as factories have been forced to halt production. With the exception of Hubei province, where Wuhan is located, most auto makers are expected to begin reopening their factories this week.
The coronavirus is projected to have a negative impact on first quarter global growth, particularly in China; however, we still believe that U.S. GDP growth will remain near 2% for 2020. While the first quarter is expected to reflect a slowdown in global growth, we anticipate these headwinds will subside in the second half of the year as conditions improve.
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