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Do Viruses Make the Stock Market Sick?

Interesting

In the last several weeks, I’ve received more than a half dozen press requests asking: “How will the coronavirus affect investment portfolios?” Although very few clients have asked me this question directly, I thought I’d share my thoughts on this topic.

I’ve been hesitating to write anything about the coronavirus, mostly because the situation is changing day by day. As of today (February 22nd), there are almost 78,000 confirmed cases of the virus and over 2,300 virus-related deaths across the globe. Currently, 98% of those infected are in China, and 99.5% of the reported deaths are there as well.

The cynic in me thinks this is very sad, but these numbers are small when compared to the same number of deaths by car accidents and the “regular” flu in the same period. I’m wondering if this is blown out of proportion by the media, trying to grab our attention and sell more advertisements.

The worrier in me thinks this is very sad, but the situation may be more serious than reported as there is little reason to trust the Chinese government’s numbers. The scope of their quarantines certainly makes it look like this is a severe issue that could spread across China and the rest of the globe.  

So, how will the coronavirus impact your investment portfolio?

The unsatisfying answer is: I have no idea. As far as I can tell, nobody knows whether the virus will eventually run rampant across the globe or burn itself out. Either way, it’s hard to predict the impact of the virus on the global economy, much less on the U.S. and global stock markets.

We know that this outbreak is impacting both the Chinese and world economies. Although the Chinese stock market is not a big part of most U.S. investment portfolios, disrupted supply chains and reduced demand for products will have a real impact on the global economy. China makes up 15.5% of the global economy and is a major purchaser of commodities like oil and agricultural products. Any slowing in Chinese manufacturing will impact a wide group of companies (“you can't build a car with only 99% of its parts”). Auto manufacturers, electronics companies, and clothing suppliers are already warning about the impact of slowing supply lines, and some companies are seeing steep declines in their stock prices.

One way to get an idea of how this might play out is to look at the previous history of similar events. For example, when the public learned of the SARS epidemic (a previous strain of the coronavirus) back in 2003, the global stock markets fell 13% from mid-January to mid-March. But, as you can see from the chart below, the market recovered nicely when it became clear the epidemic was controllable.  

SARS is only one event, so I wanted to look at stock market reactions for each of the last major epidemics. Fortunately, the good folks at Charles Schwab did the work for me. They gathered short-term performance figures for the global stock market for each of the last ten major epidemics:

The first thing I saw when I reviewed this table was how many scares we’ve had in the last 20 years. I remember that there were declines during most of these periods, but the table shows that (in most cases) the markets saw no lasting impact from these events. Of course, past performance is no guarantee of anything.

At this point, we simply don’t know how this epidemic will play out in China, the global economy, or investor portfolios. But so far, history suggests that the market reactions to past pandemics have been temporary, just like all other market downturns.  

The best advice I can share on this topic is:

  • Don’t panic; rash decisions are rarely a good strategy in life and when investing
  • Avoid close contact with people suffering respiratory infections
  • Wash your hand frequently, especially after contact with sick people or their environment

    (the last two are courtesy of the World Health Organization) 

I'll continue to closely monitor the situation. Please don’t hesitate to contact me if you’d like to discuss your specific situation in more detail.