As we closed the books on January, gains in equities earlier in the month came under pressure as the impact of the coronavirus continues to expand. During the final week of January, all of the major market indexes retreated, which left the Dow Jones industrial average to shed 1% for the month and the S&P 500 beginning 2020 down 0.2%. The hardest hit was the small-cap Russell 2000, which fell 2.9% last week, leaving it down 3.3% for the first month of 2020.
By comparison, the Real Money Post Industrial Average (RMPIA) ended January up 0.8% as 11 of its constituents moved higher month over month. The gains in this index were led by shares of Salesforce (CRM) , Adobe Systems (ADBE) , Amazon (AMZN) , Apple (AAPL) and Alphabet (GOOGL) , which more than offset sequential declines at Booking Holdings (BKMG) , Kraft Heinz (KHC) , Amgen (AMGN) , CVS Health (CVS) and Walgreens Boots Alliance (WBA) .
The coronavirus outbreak as of Sunday has killed at least 305 people and infected close to 15,000 globally, as it continues to spread beyond China. Late Friday the U.S. declared the coronavirus outbreak a public health emergency and announced mandatory quarantines for people returning from the Chinese province where the deadly disease originated. The U.K. confirmed its first cases of coronavirus on Friday, while the U.S. and Japan advised citizens to avoid traveling to China. And we'd remind readers that on Thursday the World Health Organization labeled the virus a "global health emergency" and the U.S. State Department elevated its China travel advisory to Level 4 -- "Do Not Travel."
Investors and economists are now attempting to assess the impact of this moving target on the global economy and corporate earnings. The virus already placed nearly 60 million people under partial or full lock down in Chinese cities for a week. Making those calculations even more challenging is the news that more than a dozen Chinese provinces announced an extension of the current Lunar New Year holiday by more than a week, which means businesses need not re-open until at least the second week of February. Calculations from Bloomberg suggest those provinces accounted for almost 69% of China's gross domestic product in 2019. Hong Kong announced it will extend school holidays until March 2.
In the coming days, investors and economists will likely be putting fingers to keyboards to refine, as best they can, the global GDP impact of the virus and what it means for corporate earnings. We've already started to get downward revisions for China's March-quarter GDP, and Friday morning Goldman Sachs said it expects the coronavirus will hit U.S. GDP in the current quarter by 0.4% as "as the number of tourists from China declines and exports to the Asian nation slow." Following Thursday's initial print of 2.1% for the December quarter, and ahead of the barrage of economic data next week, we'd note The Wall Street Journal's Economic Forecasting Survey already projects GDP growth for the March quarter to slow to 1.6%.
As we continue to chew through the current earnings season, we'll be taking stock of how companies are responding to the coronavirus outbreak and what they are saying about the potential impact of the coronavirus on their respective business. So far, we've heard the following:
- A growing number of airlines have cancelled flights to China including: Air India (Shanghai), Air Macau, Asiana Airlines, Finnair, Jeju Air, Jetstar Airways Singapore Ops, Jin Air Co, Lion Air and Lufthansa.
- Delta Airlines (DAL) announced Friday that it is suspending all service to China from Feb. 6 until April 30.
- American Airlines (AAL) has halted service to China after the union that represents American Airlines pilots sued the carrier to stop service to China amid health concerns.
- United Airlines (UAL) suspended all flights to Beijing, Shanghai and Chengdu from Feb. 6 until March 28.
- Air Canada (ACDVF) suspended all flights to Beijing and Shanghai from Jan. 30 to Feb. 29.
- Microsoft (MSFT) has told its employees in China to work from home and cancel all non-essential business travel until Feb. 9.
- Alphabet (GOOGL) is temporarily closing its offices in China and restricting travel.
- Amazon (AMZN) is now restricting all non-essential employee travel to China.
- Starbucks (SBUX) has now closed more than half of its locations in China and may soon close more as CEO Kevin Johnson states that the situation is very dynamic and when there is a concern, the company will close stores.
- General Motors (GM) and Honda (HMC) have extended their manufacturing shutdown in China through Feb. 9.
- Walt Disney (DIS) closed its Shanghai Disney Resort on Jan. 24 and has yet to set a re-opening date.
- When it reported its December-quarter results this week, Apple (AAPL) issued a wider-than-usual guidance range given that Greater China accounted for 15% of quarterly sales. The company has since closed all of its corporate offices, stores and contact centers in mainland China through February 9.
- Carnival Cruises (CCL) suspended nine scheduled cruises between Jan. 25 and Feb.
- Royal Caribbean (RCL) announced the suspension of three scheduled voyages through Feb. 8.
- Toyota (TM) is keeping factories in China shut down until Feb. 9
We'd note the sheer magnitude of work that is being put on hold can only have an impact on global supply lines. Odds are current March-quarter EPS expectations for the S&P 500 as well as GDP projections will need to be revised lower. But to what degree? The answer will hinge on the duration of virus, and for now that spells uncertainty for the stock market.
In terms of RMPIA, the index is not one that times the market, but rather has identified companies poised to prosper from long-term tailwinds. As we look across its constituents, the exposure to looming 5G upgrade cycles, the demands of an aging population, cloud adoption, streaming content consumption, the shift to mobile payments, the accelerating shift to digital commerce and rising disposable income in the emerging markets are all well represented. While the near-term will be impacted by the coronavirus outbreak, these long-term tailwinds should lead RMPIA to recover and -- we hope -- allow its winning streak against the Dow and S&P 500 to continue.
