In December 2019, a new respiratory illness known as COVID-19, caused by a novel coronavirus, was first detected in the central Chinese city of Wuhan. Within the first five weeks of the outbreak, tens of thousands of people were infected and more than a thousand died.
The outbreak has been categorized as a public health emergency by the World Health Organization. Not surprisingly, the virus is having economic impacts throughout the world. Major companies like Apple, Starbucks, and McDonald's closed stores in China, and airlines around the world have canceled flights to and from the region. On January 31, 2020, the Dow dropped more than 2% during the day on coronavirus fears, wiping out all the gains for the month of January.
However, the U.S. stock market seemed to quickly recover, hitting new all-time highs on February 12 even as the virus continued to spread. It's not clear how much the virus will impactU.S. investors, but the effects could go deeper than just retail and travel, hitting sectors and industries you might not expect like energy, automotive, and banking. As the world's biggest importer of oil, China is a major player in the Energy sector.
The lunar new year typically leads to an increase in demand for jet fuel and gasoline. Instead, demand for oil in China dropped 20%in the weeks immediately after the outbreak, and the price of crude oil dropped about 16%between the outbreak and early February. This is putting some strain on American oil companies. China doesn't buy much oil from American exporters roughly 2% of exports, but oil prices are set on a global level, so lower prices means lower profits. Companies like ExxonMobil and Chevron saw share prices drop in the first six weeks of 2020. At least one firm has downgraded its outlook on oil from bullish to neutral, and it says a further downgrade may be in the future. While a number of factors impact oil prices like supply, demand, and global politics lower demand driven by the coronavirus could increase pressure on the Energy sector.
The coronavirus is also slowing down many automakers. Dozens of carmakers across the world work with Chinese suppliers to produce parts for their vehicles, but many of those shops have closed as part of mandatory quarantines. This could result in some plant closures. For example, Fiat Chrysler has warned that some European plants may close if the interruption to its supply chain continues. In addition to supply chain disruptions, automakers may also face decreased demand. One analyst told the Financial Times that China faces a traumatic next few months,ť suggesting people might even delay buying cars. The high level of exposure to Chinese suppliers and consumers could add risk to automotive securities. While there may be several factors at play, many major manufacturers have seen steep declines in share prices since the outbreak became widely reported. Banking is another industry that's facing uncertainty with the coronavirus. In recent decades, the U.S. and Chinese economies have become increasingly intertwined, so U.S. companies often turn to banks to fund their expansion into China.
Growth in China has been stalling in recent years, down from a high of around 14% in 2007. Some analysts predict coronavirus could slow growth even more to around 3.7%. If growth slows further, U.S. banks could feel the strain. According to Moody's, lower economic growth could lead to lower demand for loans and mergers and acquisitions, meaning potentially weaker earnings for banks. With all the uncertainty, consider having a plan to hedge your portfolio against risk.
For example, some investors might use exchange-traded funds, options, or futures contracts as part of their hedging strategy. You can also look at what sectors you'reinvested in and make sure your holdings are diversified enough to withstand any turbulence. Either way, consider your ideal risk and return parameters, and set a clear exit strategy in case you're wrong. Most importantly, keep your eyes on the longer-term trends. As of mid-February 2020, stocks were still near all-time highs, corporate earnings were still growing, and the Federal Reserve made it clear it would support markets with accommodative monetary policy.
Ultimately, we don't know how the economy will react to this in the long term, but we do know that more than 400 companies have talked about the coronavirus in their first quarterly earnings calls of 2020. Being aware of the potential sector and industry impacts of the coronavirus can help you prepare your portfolio. As always, dig past the headlines, and look at sources like earnings, analyst reports, and Fed statements to help connect the dots of how major global events can impact markets.
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