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An Important Market Alert from McKay Wealth Management: The Coronavirus and the Global Economy

Investing Retirement Funding Insights

The Coronavirus and the Global Economy

As of February 26, 2020, the death toll from COVID-19 — the official name of the coronavirus first reported in

Wuhan, China — passed 2,700, while the number of confirmed cases exceeded 80,000. Almost all were in

China, most of them in Wuhan and the surrounding Hubei province. But more than 2,500 cases, including

46 deaths, had been reported in almost 40 other countries. A surge of cases and deaths in South Korea,

Italy, and Iran caused new concern that the virus may be difficult to contain.1

Cities under lockdown

By mid-February, at least 150 million people in China were under restrictions affecting when they could

leave their homes, and more than 760 million — about 10% of the world's population — lived in communities

under some form of travel restriction.2 Most global airlines cancelled service to and from China, disrupting

tourism and business travel.3

The Chinese government enacted restrictions around the time of the Lunar New Year celebration, during

which many businesses were closed, lessening the immediate impact. However, as factories and other

businesses remained closed after the holiday, the loss of Chinese production and consumer spending

began to take a toll on global businesses.4

Lost supply and demand

Many U.S. technology companies have manufacturing operations in China while also selling to Chinese

businesses and/or consumers. Companies with substantial exposure to the slowdown in China include big

tech brands such as Apple, Dell, Hewlett Packard, Intel, and Qualcomm, as well as many smaller tech

businesses.5-6

Vehicle manufacturers throughout the world rely on Chinese-made parts, and many have plants in China.

General Motors (which sells more cars in China than in the United States), Ford, Toyota, BMW, Honda,

Nissan, Tesla, and Volkswagen all suspended operations in China, while Hyundai and Renault closed

plants in South Korea, and Fiat Chrysler closed a plant in Serbia, all due to parts issues.7-9

Global retailers including Apple, Ikea, Levi Strauss, McDonald's, KFC, and Starbucks temporarily closed

stores in China.10-11

In addition to disruptions in the global supply chain and Chinese consumer market, the tourism industry in

the United States, Europe, and other Asian countries may be hard hit by the absence of Chinese tourists.

One estimate suggests a loss of almost $6 billion in U.S. airfares and tourist spending.12

Although it is too early to measure the full effect on global business, a private report released on February

21 indicated that U.S. business activity had slowed in February to the lowest level in six years, with the

biggest hit to the service sector, where travel and tourism are major components. The report also indicated

a sharp drop in Japanese business due to lost tourism and export orders. Exports were down in Germany,

but the initial impact on the eurozone was minimal.13

Oil pressure

China is the world's largest importer of crude oil, and Wuhan is a key center of its oil and gas industry. The

prospect of lower demand drove oil prices into bear-market territory — defined as a drop of 20% from a

recent high — in early February. Prices rose later in the month but dropped again with news that the virus

may be spreading. Natural gas prices have also been hit by the prospect of lower growth in Asia. While

lower prices may be good for U.S. consumers, oil-exporting nations, including the United States, will face

lower revenues, and energy companies that are already on rocky ground may struggle.14-17

Market reaction

In late January, the Dow Jones Industrial Average lost 3.7%, due in large part to concerns about the virus,

wiping out gains for the year.18 The market bounced back quickly and set new records in February, but

weak business news and a rash of cases outside of China sent it plunging, with a loss of almost 8% from

February 19 to 25.19-20 This suggests that the market may be volatile for some time and that future

direction might depend on the progress of disease control and emerging information on the impact of the

virus on U.S. and global businesses.

Global growth outlook

Anything that affects China, the world's second-largest economy, can have a powerful ripple effect around

the globe. An early February report by Moody's Analytics estimated that every 1 percentage point reduction

in China's real gross domestic product (GDP) will reduce global GDP outside China by 0.4%. The report

projected that disruption caused by the virus would cut more than 2 percentage points off China's GDP

growth in the first quarter of 2020 and result in a loss of 0.8% growth for the year. This in turn would cause

a loss of about 0.3% in annual global GDP growth outside China and about 0.15% in the United States.

Moody's lowered its projection for 2020 global growth from around 2.8% to 2.5%.21

In a February 16 forum, Kristalina Georgieva, managing director of the International Monetary Fund, was

more optimistic, suggesting that the virus might shave 0.1% to 0.2% off the IMF's 2020 global growth

projection of 3.3%. Georgieva cautioned that there was still a "great deal of uncertainty" and emphasized

that the economic damage depends on the length of the disruption. If the disease "is contained rapidly,"

she said, "there can be a sharp drop and a very rapid rebound."22

The immediate concerns are to combat the virus on a human level and normalize business activity, but the

outbreak could accelerate the shift of U.S. and European manufacturing away from China, creating a more

diversified global supply chain.23-24 The situation remains in flux, so you may want to keep an eye on

further developments.

All investments are subject to market volatility and loss of principal. Investing internationally carries

additional risks such as differences in financial reporting, currency exchange risk, as well as economic and

political risk unique to the specific country. This may result in greater share price volatility. Shares, when

sold, may be worth more or less than their original cost.

1) South China Morning Post, February 26, 2020

2) The New York Times, February 18, 2020

3-4, 21) Moody's Analytics, February 2020

5, 23) The Wall Street Journal, February 18, 2020

6, 10) Los Angeles Times, February 4, 2020

7) Forbes, February 12, 2020

8) Car and Driver, February 4, 2020

9) The Wall Street Journal, February 14, 2020

11-12, 14-15, 18) The Wall Street Journal, February 3, 2020

13) The Wall Street Journal, February 21, 2020

16, 20) The Wall Street Journal, February 25, 2020

17) The Wall Street Journal, February 7, 2020

19) The New York Times, February 20, 2020

22) Bangkok Post, February 17, 2020

24) South China Morning Post, February 18, 2020