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Coronaviruses are a family of viruses common in animals, with the newest deadly strain (Novel Coronavirus) identified in Wuhan, China. Coronaviruses, which get their name from their crown-like appearance, come in many types that cause illnesses in people and animals and invade the respiratory tract via the nose. After an incubation period of about 3 days, they cause the symptoms of a common cold, including nasal obstruction, sneezing, runny nose, and occasionally cough.
According to “Google Trends”, the search term “Coronavirus” continues to trend upwards since the beginning of the year. Markets seemed to be shaken recently and more volatile due to the concern about the recent outbreak of the coronavirus, which has claimed at least 80 lives, with nearly 3,000 people sickened as of Sunday, January 26th. The concern about the virus has pulled the Fear & Greed Index from “Extreme Greed” a week ago, to a “Neutral” territory as of today. As you read the headlines, you may find yourself concerned and worrying about a global epidemic.
You wouldn’t be human if you didn’t experience some degree of fear when you read headlines based on current events such as the recent coronavirus. At times like this, the great achievement is simply not to give in to the fear. Our goal at Intelligent Investing is to help you with that achievement.
How the stock market has performed during past viral outbreaks
We have a history of infectious diseases, including severe acute respiratory syndrome (or SARS), Ebola and avian flu. I remember when I visited Zambia several years ago, the Ebola virus was making headlines and people were wondering whether I’d be safe in Zambia. I remember pulling up a map to see where the Ebola virus was being reported, and where Zambia was in relation. The difference in the distance would be the equivalent of Alaska to the midwest…not near at all. By informing myself of this fact, I seemed to calm my nerves.
|Epidemic||Month-end||6-month % change of S&P||12-month % change of S&P|
|Pneumonic plague||September 1994||8.22||26.31|
|Avian flu||June 2006||11.66||18.36|
|Dengue Fever||September 2006||6.36||14.29|
|Swine flu||April 2009||18.72||35.96|
Source: Dow Jones Market Data
History Doesn’t Repeat Itself, But It Often Rhymes
The stock market was quite immune to the epidemics in the last two decades. Since 2000, the Swine Flu outbreak in 2009 was the worse pandemics which claimed over 200,000 lives worldwide and 4,000 in the U.S. However, the S&P 500 Index rose 36% in the 12 months after the outbreak started in 2009 (possibly helped by the lowest inflection point of the 2008 financial crisis).
In the short run, economists estimate the coronavirus outbreak could lower China’s GDP growth by 1%. The impact on the U.S. economy would be minimal as US growth is more dependent on domestic demands and services. Industries such as travel and tourism such as airlines and hospitality may be hurt the most, and international and emerging market stocks may have more downside risk as their economies are more related to China.
Ultimately, the severity of the virus may dictate the market’s reaction, and just because the markets have behaved a certain way in the past, doesn’t guarantee that they will do the same thing this time.
Could the worst case happen? Yes, but as Jason Zweig’s recent Intelligent Investor article points out, such disastrous fears often bubble to the surface quickly without factual support, then peter out as efforts counter effects, explanations moderate fears and the trend begins to reverse. Underscoring the point, Zweig concludes his article with a quote from Laurence B. Siegel (Gary P. Brinson director of research at the CFA Institute Research Foundation, and recent Intelligent Money Minute interviewee): “Apocalyptic thinking has always been wrong as a forecast, and it will continue to be wrong.”Apocalyptic thinking has always been wrong as a forecast, and it will continue to be wrong. ~Laurence B. Siegel Click To Tweet
The coronavirus situation will continue to play itself out, as have all the numberless “crises” that have gone before it.
It remains impossible to predict when and how this problem will be resolved. Likewise, it is impossible to know when and how the markets will anticipate (or react to) such a resolution, and that is a completely different issue.
My goal in writing this is simply to suggest that–difficult as it may be–we take our focus off the catastrophist headlines, and put it where it belongs:
- On your goals;
- On our long-term plan for the achievement of your goals; and
- On your portfolio as the long-term funding medium for that plan.
We didn’t and don’t invest as a speculation on the outcome of current events. We invest pursuant to principles that have always prevailed in the past. We’ve elected to be guided by history as opposed to headlines. Invited by the media to subscribe to the bizarre theses “This time it’s different,” we respond instead “This too shall pass.”
If you aren’t working with a financial advisor who focuses on the three things above with you, we’d love to have a quick coffee and introduce ourselves. We’d be happy to have a short conversation with you to see if we can serve you and your family. The families we can serve best have between $500k to $5M of investable assets. Click here to learn more about our firm, or click the link below to schedule a stress-free call or meeting.
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