economic perspective

March 2020


By Thomas Dillman

With a global viral outbreak, Mutual of America Capital Management LLC explores some of the key impacts upon the financial markets and provides an outlook for domestic and global growth in 2020.

Through mid-February, the S&P 500® Index advanced 4%, while the NASDAQ, with its heavy weighting in technology stocks, was up nearly 8%. Other markets around the world showed more-mixed results as the impact of the coronavirus outbreak in China in early January was projected to have varying effects depending on each respective market's economic exposure to China. Of course, the U.S. was not exempt from fallout from the virus given that trade between the two nations is significant. However, U.S. stock markets remained robust, reacting modestly and only briefly to new revelations about the spread and lethality of the virus.

That was until Monday, February 24, following weekend reports of serious outbreaks in northern Italy and Iran and the rate of new cases escalating in South Korea and Japan, even as the rate of new cases in China had begun to slow. Markets around the world reacted violently, with the S&P 500® down 3.35% on Monday and down 11.5% for the week. The bond market also reacted dramatically, with the 10-year Treasury yield actually falling almost daily from January 1 to February 28 (from 1.90% to 1.19%, an all-time low). In the initial stages, part of that move was the result of an expectation that the Federal Reserve (Fed) would be lowering rates in response to the potential impact of the virus – a step as yet not taken. This suggests the bond market actually anticipated the potential economic fallout from the virus well before the stock market did. The World Health Organization (WHO) warned in late January that the illness caused by the coronavirus, COVID-19, was "a public health concern of international concern," but markets did not really react until the unexpected magnitude of new cases out of China was reported.

Market and Individual Reactions to Coronavirus

At the time of this writing, the number of cases reported globally is more than 83,000, while there have been almost 2,900 reported deaths. These numbers are likely understated. Of the total number of reported cases, 93% are in China, but new cases continue to show up in widely dispersed places around the world. According to the Center for Disease Control and Prevention (CDC), cases have shown up in 58 different countries on every continent except Antarctica. The counts in Italy and Iran, the reporting of which seems to have sparked the dramatic selloff in stocks discussed earlier, have risen rapidly – to 600 and 200, respectively – over the week since their initial reports. As of Friday, February 28, in the U.S. there have been 60 reported cases, but in only 8 widely dispersed states so far, including California (27), Texas (10), Nebraska (13), Washington (5) and Massachusetts (1).1

We have made the case many times that markets tend to initially react negatively to macro events, then quickly recover unless the event is deemed to have serious economic consequences. At this point, it is very clear that the coronavirus has had, and will likely continue to have, diverse negative consequences to growth globally. The ultimate magnitude of these effects is unknown at this time. Furthermore, clarity on this issue will take time as the virus spreads, the effects of future policy response have their effects, and the dislocations in the global supply chain are worked through and rectified. It is very clear that China's growth could be severely constrained in the first quarter as capacity utilization is running at 50% or less. As a result, industries and companies in and outside China that depend on products and parts made in China will be unable to sustain growth, with negative implications on earnings. Airlines, shipping and rail, oil and natural gas, industrial commodities, semiconductors and auto parts, to name a few of the most prominent sectors, are already suffering.

Another reaction to the threat of contracting COVID-19 will likely be self-quarantine, that is, people avoiding activities where large or even small numbers of people congregate, especially in enclosed spaces, such as airplanes, cruises, concerts, sporting events, shopping malls and stores, movie theaters and restaurants. As a result, spending associated with such events will not occur. As the virus spreads, the CDC has been posting risk levels for travel from "travel, but be careful" to "at-risk groups avoid travel" and "avoid all nonessential travel."2

Central Banks React

Federal Reserve Chair Jerome H. Powell, in his recent testimony to Congress, made it clear that the Fed is keeping a careful eye on developments and would act if the situation worsens significantly. With inflation well contained, there is little to constrain such action in the face of a serious threat of recession. A problem with further cuts is that, from current low levels, rates can only be cut another 150 basis points before reaching the lower bound of 0%. Historically, the Fed has had room to lower rates much more in response to the threat of recession. While other central banks around the world, including those of Japan and the Eurozone, currently have negative rates, that tactic does not seem to have done much to enhance economic activity in those markets.

Central banks will likely have to come up with new tools to combat the next recession. In the meantime, should the Fed initiate a further cut, or cuts, markets would probably react positively for at least a short time. However, monetary policy is much more effective in stimulating demand than it is at dealing with a supply disruption.3 How would lower interest rates stimulate increased production of goods if those goods required parts that had stopped being manufactured and were unavailable? And why would people decide to travel more because of lower interest rates, or even lower prices, if the ultimate cost was illness or even death?

It is interesting and possibly instructive to compare the COVID-19 virus to other epidemics of the past. The chart below, assembled by Goldman Sachs with information from a variety of sources, including WHO, CDC, National Institute of Health (NIH), Department of Labor, Chinese Ministry of Health, Lancet and The New York Times, puts the COVID-19 virus in historical perspective:

To summarize, the COVID-19 virus, based on current data that is likely incomplete, appears to be more contagious but far less deadly than SARS or MERS. At the same time, it appears to be far less contagious but more deadly than the H1N1 virus or this season's U.S. flu epidemic. An important point about the coronavirus is that its fatalities are largely among older persons with preexisting respiratory conditions. Nonetheless, as noted, we expect cases and deaths to increase around the world before abating.

Concerns About a Global Recession

As such, it is our opinion that the markets' responses, as well as human behavioral responses, to the coronavirus are symptomatic of panic, but panic that may prove justifiable, especially in terms of its effects on individual economies and global growth in general. It is worth noting that global growth is already suffering from the effects of the three-year trade war between the U.S. and China. Despite a truce and modest retrenchment, tariffs remain high on both countries. The coronavirus is adding stress on global trade. China's economy had already been slowing before the virus struck and is sure to print low- or no-growth GDP for the first and second quarters at least. While there were signs at the end of last year that the global growth slowdown of 2019 was bottoming, it is clear to us that recession odds have increased substantially as a result of disruptions caused by the coronavirus. In addition, prior to the outbreak of the virus, Germany was on the verge of a recession, and Japan had made recession inevitable in that country with a recent increase in its consumption tax from 8% to 10%. Furthermore, Japan is one of the countries, outside China, hardest hit by the virus outbreak, and the case is similar in South Korea. These four countries alone represent a significant proportion of global trade and GDP. The proportion of positive earnings revisions to negative revisions is falling in every economy in the world, with the biggest declines in China, Japan, other Asia-Pacific nations and Emerging Markets, and the smallest in Europe and the U.S.5

Domestically, the U.S. economy continues to grow, although at a slower pace than over the past two years. Employment remains strong, housing shows continuing strength, and consumer spending is solid but not stellar. Consumer spending, in particular, is likely to slow in response to concerns about the spread of the virus, and employment and housing may temporarily suffer as well. Manufacturing and capital spending remain dormant and will probably continue that way given the uncertainty created by the coronavirus as well as continuing concerns about trade.

Remain Vigilant and Continue to Think Long Term

While the coronavirus and trade remain key risks to global growth, the resolution of the risks that worried markets during 2019 – the U.S.-China trade war, the Fed failing to cut rates early enough, Brexit, perennially difficult budget negotiations and the impeachment of President Trump – had seemingly given investors confidence that new risks have a high probability of being resolved and that the economic expansion could continue seemingly indefinitely, at least until the recent stock market correction began. If we begin to see signs that the spread of the virus is slowing, and that economic activity is beginning to pick up, that confidence could return and propel the markets forward again. However, we believe it more likely that cases will continue to appear in new locations around the world and expand in many of these regions, and increasingly in those ill-equipped to deal with the disease. We also think economic growth will continue to weaken for longer than most commentators are currently predicting. Stock investors are generally optimistic because history has shown that markets advance at about a 7% average annual rate over long periods of time. Such an outlook lends itself to underestimating the risks of new negative macro events. As things worsen, markets finally arrive at a turning point, generally at valuation levels already not firmly supported by fundamentals. The consequence is a correction (down 10%) or a bear market (down 20% or more). When the market finally realizes that the economy is entering a recession, stocks tend to decline well in excess of 20% depending on the perceived severity and depth of the recession. Two recent examples are the tech bubble of 2000 and the financial crisis and Great Recession of 2008.

We point this out not because we are confidently predicting recession, but to raise vigilance as events unfold. It is a blunt truth that we really don't know how things will unfold over the next few months. If the rate of new coronavirus cases begins to slow and global economic news shows improvement following last year's slowdown, stock prices could reverse their recent decline and continue to advance to new highs if economies recover quickly. If cases spread and economic disruption worsens, recession becomes more and more likely. Despite the more negative tone of this Economic Perspective compared with our January essay, our perspective remains that if you have an asset allocation that is appropriate and prudent based on your age, risk tolerance and/or your expected retirement date, then it is generally best to stay the course rather than make hasty decisions that may hurt your portfolio's performance over the intermediate or longer term.

Thomas Dillman is the former President of Mutual of America Capital Management LLC.


The New York Times, "Coronavirus Map: Tracking the Spread of the Outbreak," February 28, 2020.




Robert Perli, Cornerstone Macro Policy Research, "The Fed May Well Cut, But That Won't Help Much," February 24, 2020.


Matthew T. Brennan, CFA, Fulton Bank, Economic Update, February 25, 2020.


Nigel Tupper, Merrill Lynch (Australia), Quant Strategy, "Global Earnings Revision Ratio, February 28, 2020.


SARS coronavirus (Severe Acute Respiratory Syndrome), 2002–2004, China, Hong Kong, Taiwan, Singapore, Canada.

MERS (Middle East Respiratory Syndrome), 2012, first detected in Saudi Arabia, has subsequently spread to nations in Africa, Asia, Europe and North America.

H1N1 (Swine Flu), 2009, first occurrence in United States, has subsequently spread globally like a common flu.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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