Last week the coronavirus was looking more contained. Economic numbers were strong, and the market was pricing in the widespread perception that any economic impact from the virus would be offset by policy makers both at home and abroad who would act fast to provide as much stimulus as needed. All of that changed yesterday when coronavirus deaths in Italy and the spread of the virus to South Korea caused renewed worry. The markets sold off with the Dow down more than 1000 points or 3% and oil off sharply. Meanwhile safe haven assets like gold surged. So far, the economic impact has been limited mainly to companies with significant operations in the affected area of China as well as some travel or energy-related sectors. U.S. economic activity has not yet shown a significant impact. For now, the decline in asset prices is mostly driven by negative sentiment rather than underlying fundamentals. Despite yesterday’s panic, there is a consensus among Wall Street strategists that investors should stay in the market but remain cautious and diversified while closely monitoring the situation.

What is the U.S. Exposure to China?

In this era of globalization, it is difficult to quantify exactly how closely the major economies are linked, however, one fairly straightforward measure is to look at how much of the revenue earned by U.S. companies comes from China. By this measure, exposure is a modest 4.4%. And so even a catastrophic event in China is unlikely to have a serious impact on U.S. GDP. Though the threat of the virus spreading is real, it is helpful to look at the economic data to keep the impact in perspective. Whatever impact the epidemic has is likely to be less direct, such as the negative impact of oil prices on energy companies.

Relatively Weak Expansion Limits Bubble Risk

As the market rally continued last week, there was renewed discussion of whether the stock market could be approaching the territory of a bubble and impending recession. Some commentators pointed to the record length of the expansion since the financial crisis and the performance of a handful of tech companies as evidence of overheating in the market. As you can see in the chart below, however, despite the fact we are in one of the longest periods of expansion, it has also been the weakest in terms of GDP growth. This is a positive sign that continued growth could be sustainable.

What We’re Reading

  • Are We In a New Tech Bubble? A widely circulated chart last week set off debate about whether we are experiencing a replay of the 1990’s bubble in the tech sector. A closer examination reveals that the current rally is much more limited than in the 90’s meaning there is less risk of a systemic crisis or crash.… (Article)
  • Have Private Equity and Venture Capital Peaked? With massive funds having poured into private equity a continued outperformance is unlikely, however, even in the absence of huge returns institutions find this asset class provides some diversification benefits. … (Article)

Market Snapshot

As of 2/24/2020 (Cumulative Returns)1

Did You Know?

 Forget cryptocurrencies—the next big asset class will be buying shares of Air Jordan sneakers. Driven by a couple of growing startups, the idea of breaking up collectibles into small interests and making a market in them allows people who appreciate these items and understand their value to participate in the appreciation without having to be super wealthy. … (Article)

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser.

1.Source – Morningstar, Inc. Global Stocks is represented by MSCI ACWI Index, Developed Markets is represented by MSCI EAFE Index, and Emerging Markets is represented by MSCI EM Index. Corporate Bonds is presented as the Bloomberg-Barclays U.S. Aggregate Bond Market Index. Municipal Bonds is presented as the Bloomberg-Barclays Municipal Bond Market. High Yield Bonds is presented as the Bank of America-Merrill Lynch U.S. High Yield Index. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate (NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.