Coronavirus and the Dow down 1000+ Points: Time to Panic?

February 25, 2020

The new coronavirus, dubbed COVID-19, has led to 80,000 infections and over 2600 deaths since originating in Wuhan, China in December 2019. This outbreak which the World Health Organization (“WHO”) has said is a “public health emergency of international concern” is a true human tragedy. Pretty scary at first glance, but taken in context it’s not so different from the normal flu. According to Centers of Disease Control, this season through February 7, more than 19 million people just in the US had caught the flu of which 10,000 died from it. 

While the flu is caused by any of several different types and strains of influenza viruses, COVID-19 is caused by one virus, the novel 2019 coronavirus, now called severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2. When looking at the symptoms of COVID-19, we find that they are similar to that of the influenza (flu) virus, i.e. cough, runny nose, sneezing, sore throat, fever, headache, etc. Symptoms for both COVID-19 and the flu can be mild or severe and can result in pneumonia which can lead to death. According to WHO, the infection has been fatal in 2-4% of cases within Wuhan, but in less than 1% elsewhere. Rates go up for the elderly and those without sophisticated health care providers. Again, pretty similar to the normal flu.

Both COVID-19 and the flu can be spread from person to person through droplets in the air from an infected person sneezing, coughing, or just talking. Neither virus is treatable with antibiotics. Good news is that there has been promising work in the drug and vaccine space against COVID-19 but those need to be tested. Prevention methods for both include frequent, thorough hand washing, staying home when sick and limiting contact with those infected.

It’s still unclear as to how this situation will unfold and how much spreading of COVID-19 will take place. Fortunately, the immediate health risk for the general American public is low at this time. Further, it appears that China is getting the disease under control as the pace of infections (as represented by the “daily tally of new cases”) peaked a few weeks ago and has since steadily declined. However, reports over the weekend showed that the coronavirus is not only just appearing in other countries but unfortunately accelerating in some like Iran, South Korea, and Italy. The Italy news has many worried that Europe could be in the first innings of the ballgame China has been stuck in.

We’ve talked before how the stock market doesn’t like uncertainty and a virus like this only compounds that. We know in China that business has been severely affected. Not only are people avoiding going out to the movies and having fun outside, they’ve been told to stay home to stop further contagion. Most factories have basically been shut down since the Lunar New Year. These Chinese factories help produce many goods needed by world-wide manufacturers. If XYZ Company in Canada can’t get that one particular China-made good that goes into its finished project, it’s stuck in limbo until things clear up. Thus, we basically have a global supply-side shock in the making. Not good for the global economy! And don’t forget that China now accounts for 15% of the whole world GDP. Talk about ripple effect!

The odd thing that happened is that when COVID-19 gained notoriety in January, the US stock market sold off only to quickly recover and just recently was trading at record highs. The market shrugged off the bad news, putting it into the “one-time” event category or figuring that the global central banks would turn more dovish on rates and thus come to the rescue.

But the weekend news about Iran, South Korea, and Italy as well as the warning that an extended Chinese shutdown could cost the world up to $1 trillion in lost output, brought the fear back. Which led to the DOW’s worst trading day in two years, down over 1000 points yesterday!

So is it time to panic? Of course not.

COVID-19 is a terrible disease outbreak. Unfortunately, it’s not the first and it won’t be the last. We’ve seen this happen before; just think of the following: Ebola, Zika, Swine Flu, SARS. Let’s take a look at the market reaction to some of these:

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The stock market sold off in all of these cases indeed. But more importantly is to see how the market recovered. 

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As you can see, in most cases, the market typically recovers within six months.

We come back to our old saying of: control what you can control and don’t get emotional from the things you cannot.

Moreover, don’t let short-term market events alter your long-term planning. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. So avoid that mistake by staying invested and staying disciplined and focusing on things that can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

If you’d like to further discuss how disease outbreaks affect your portfolio and/or long-term financial planning, don’t hesitate to contact us.

 

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