For much of the year, I’ve been talking about the likelihood that stock market returns in 2020 will likely be back-end loaded, that we’ll need more visibility on certain geopolitical matters before markets really kick into gear. However, with the recent Coronavirus outbreak, we may need to re-evaluate that position; it’s difficult to construct an investment thesis in the current data vacuum.
For now, the small number of data points that can be garnered to make sense of the macroeconomic picture are not good. Chinese oil demand was down 20% earlier this month, and that may very well be the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and certainly the most sudden since the attacks of September 11.[i] With some huge Chinese cities under varying versions of lockdown, the total number of cars and trucks on the road has fallen, and factories are not running at full capacity. According to Morgan Stanley, pollution near Shanghai-- a typically reliable indicator of economic activity that the Chinese government can’t really lie about-- has plummeted. Container ships are sailing with smaller than normal cargo loads, and prices for bulk carriers that move iron ore and coal have collapsed.[ii]
With holidays being extended and many areas facing transport and travel restrictions, production will be delayed and supply chain disruption seem likely to occur. Chinese manufacturing cities such as Wuhan are intimately entangled with the supply chains of the entire world, and that means that both the disease and the containment measures enacted to control it (such as the quarantine still in place for 70 million people) will probably have a dramatic effect on businesses across disparate industries. And that’s the general consensus among economists and Wall Street analysts, whether it’s from David Kostin over at Goldman Sachs or Tao Wang at UBS or MW Kim at JP Morgan.
In her most recent research report, Wang wrote, “If this lasts longer than a couple of weeks, the first quarter of 2020 could be “one of the slowest global growth rates of recent record,” though the economy will likely recover in the second quarter. Goldman expects about the same timeline, and they recommend buying cyclical stocks. We here at The RG Bar Investment Group have heralded a return to cyclicality this year, so our investment thesis continues to dovetail with what Goldman is forecasting.
We think strong underpinnings of the economy should offer market stability, although we continue to expect volatility stemming from election developments. All in all, we believe 2020 will be a year of limited engagement by central banks, sequentially accelerating US growth, and a healthy consumer backdrop, all of which are typically supportive of earnings growth. In our view, investors should remain strategically allocated to risk assets, but also consider shock absorbers (i.e. diversifiers) in their portfolio to manage potential flare-ups of volatility.
[i]Cang, Alfred; Javier Blas; Cho, Sharon; “China Oil Demand Has Plunged 20% Because of the Virus Lockdown,” Bloomberg Green; February 2, 2020.
[ii]Paris, Costas; “Coronavirus Toll on Shipping Reaches $350 Million a Week,” The Wall Street Journal; February 10, 2020.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
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