The coronavirus outbreak is in full swing. The mainland China stock market index CSI 300 plunged 7.88% at the close today. The USA and Italy have reportedly closed their borders for people coming from China. Air carriers could be hurt disproportionately more.
Is it time for US stock investors to worry a lot? No. I think the coronavirus would prove a temporary shock. Sooner, rather than later, a vaccine will be discovered. Yes, the economy of China will be hurt disproportionately more and since China's economy makes up close to 15% of global gross domestic product and China's GDP growth accounts for a large part of global economic growth, the global economy will slow down further in 2020.
But the monetary, cash, liquidity injections of the Federal Reserve, European Central Bank, Bank of Japan and now the Peoples Bank of China should prop up markets and the economy through the first half of 2021. Than, most likely, Donald Trump would have won a second US Presidential mandate and he will ease up the pressure on the Federal Reserve to lower the federal funds rate. As soon as the Federal Reserve starts to hike rates levels again to prepare for the next economic downturn, we will witness a self-fulfilling prophecy and the economic malaise or with other words a deep several years of US and global economic recession will come.
With the recession that will come in 2021 most hurt will be both public and private technology stocks. Best bets then will be consumer staples like Walmart, Mcdonald's, utilities, pharmaceutical businesses like Pfizer, Johnson and Johnson. Gold mining stocks should also do well in the coming economic recession as gold will rise driven by money creation by central banks. Real estate stocks will not do well, since real estate seems overvalued around the world.
All in all, I think the current coronavirus crisis will not be long lasting. It will fade away by the second half of 2020. Again, buy the dip based on valuations could prove a good strategy.
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Petar
Vladimirov Posledovich is not liable for any investment losses incurred
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Respectfully yours,
Petar Posledovich
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