Volatility returns with a vengeance as coronavirus outbreak grows

February 3, 2020

3 minute read

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Head of AIS Business Solutions Sophie Antal Gilbert discussed potential market and economic impacts of the coronavirus outbreak. They also chatted about Brexit day and provided an update on fourth-quarter earnings season.

Markets tumble as coronavirus fears rise

On Jan. 30, the World Health Organization (WHO) declared the coronavirus outbreak a public health emergency of international concern, Ng said. “Already, the number of confirmed infections from coronavirus has surpassed the number of infections from the SARS outbreak of 2002-03,” she noted, “which means the virus is likely to have a larger economic impact on China than SARS did.”

In addition, the Chinese economy today makes up a much larger portion of global GDP (gross domestic product) and trade than it did in the early 2000s, Ng said. “This means that the impact from the virus will likely be felt worldwide,” she noted. As evidence, Ng pointed to the S&P 500® Index, which ended the week of Jan. 27 down over 2%.

The recent volatility has been made worse by the fact that equity markets were a little overbought at the start of the new year, she noted. “When equity market sentiment becomes slightly euphoric, it makes the market more vulnerable to bad news—and the past two weeks have been a classic example of this,” Ng explained.

She noted that while the tail risk from the pandemic has increased over the past week, she and the team of Russell Investments strategists still believe that equity markets are likely to rebound fairly quickly once the outbreak is contained. “If sentiment turns overly negative and the market becomes oversold, there may be some potential buying opportunities,” Ng concluded.

Brexit day arrives as UK leaves EU

Although the UK formally leaves the European Union on Jan. 31, any changes in the country in the short-term will be few and far between, Ng noted. “The EU and UK will enter into an 11-month transition period, in which agreed-upon things like trade, travel and payments will remain the same as before,” she said. Ng added that while the UK will no longer have a say in EU decision-making institutions like the European Parliament, the country will still adhere to EU rules through the transition.

If the transition period—currently slated to end Dec. 31, 2020—does not get extended, the UK and EU may once again find themselves at the proverbial cliff’s edge, she said. “The two parties would have a very short timeframe in which to work out a permanent trade deal before all benefits stop,” Ng explained. She added that the British pound and UK-exposed investments may face a fair amount of volatility throughout the transition period.

Earnings season update: Mega-cap companies shine

A large number of S&P 500 companies reported fourth-quarter earnings the week of Jan. 27, Ng said, with Amazon and Apple among the strongest performers. Microsoft also reported fairly strong numbers, with Facebook earnings a little more medicore, but still solid, she noted.

“The fact that these mega-cap companies beat expectations is a good sign for Q4 earnings season overall, as these companies represent a large part of the S&P 500® Index,” Ng said. While U.S. fourth-quarter earnings growth is still likely to remain low compared to previous years, a modest recovery in earnings this year is possible if consumer spending remains strong and U.S. manufacturing rebounds, she concluded.