Market Update - January 2020

Good afternoon,

Markets continued to rise for the first month of 2020 (continuing the outstanding 2019 upward trend).

Much of the continuing optimism is based around some assurance from the US Federal Reserve that interest rates will stay low this year. There is a long history of rising interest rates leading to the end of strong equity market uptrend cycles. As our chief strategist points out below:

As you can see above, when the blue line has increased historically (central bank interest rates), grey vertical bars tend to follow (recessions). With rates in decline, this gives some hope for the current market uptrend to continue (at least for the foreseeable future).

Major news trends in January included the continuing Trump impeachment and the outbreak of coronavirus. I have mentioned in previous commentaries that I don’t think the impeachment proceeding are a very big deal from an investment portfolio perspective. The major thing to watch for on the US political front is who the Democratic nominee will be and how their campaign might impact the markets in 2020.

Coronavirus however has had a market impact this past week. This has been especially the case for companies that derive a lot of their revenue from Asia, as well as emerging market investments in general. Our economists are of the opinion that the market is overreacting to the outbreak, and that the impact to the global economy at this point is in the fear more than in actual harm. I have summarized their rationale below:

• The Chinese government has quickly acted and shared information with the World Health Organization (roughly 3 weeks since the first case vs. 4-5 months during the SARS outbreak). Lessons have been learned.

• The mortality rate (~3% vs. ~10% for SARS) suggests that the virus generally ends in more fear than harm, while fatalities up to now (~100, all in China) mostly concern elderly people with pre-existing conditions.

• Recent history abound with cases of virus outbreaks, with SARS in 2003, H1N1 in 2009, Ebola in 2014, and Zika in 2016 all having their peculiarities that make them imperfect comparables in the current context. Yet, they have a common denominator; a limited/temporary economic impact. Have a good weekend!

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