Coronavirus Outbreak

Brent Woyat - Jan 29, 2020
By now, you have probably heard about the coronavirus outbreak in Wuhan, China. As of now, there have been about 7,087 confirmed cases, with over 169 deaths.
Most cases have been within China itself, however the virus has spread to a small number of individuals in over fifteen countries. The outbreak has certainly put global markets on edge. On January 27th the Dow dropped over 450 points due to concerns about the viruses spreading.2 While there’s no reason to be alarmed, this is a good opportunity to remind ourselves why taking a longer view is so important. I’ll explain what I mean with a brief Q&A:
 
Q: I’ve been ignoring the news. Can you tell me what’s going on?
 
Coronavirus is a group of viruses that cause respiratory infections. For most people, these infections rarely amount to anything worse than a common cold. However, certain strains can be either more virulent, more transmissible, or both. The SARS outbreak in 2003 was a similar type of virus to the coronavirus.
 

A new strain of coronavirus is behind the current outbreak. First identified in Wuhan at the beginning of the year, the virus is transmittable from person to person and can cause severe pneumonia, especially in the elderly and people with weak immune systems. The outbreak seems to have worsened in recent weeks, with travelers from China carrying the virus to multiple countries. In response, Wuhan has gone into lockdown, and many countries have evacuated their citizens.

Q: Okay, so why are the markets worried about this?
 
The immediate concern is what the outbreak will do to China’s economy. As the second largest in the world, whenever China sneezes, other economies feel the wind. With a virus outbreak, analysts are worried about both slowing consumption and production, as well as dramatically reduced travel to and from China. This could impact the bottom-line of those countries and corporations that do business with China (Which, of course, is most of them).
 

The other concern is what will happen if this outbreak turns into a worldwide pandemic. I’m not a scientist, but that seems more like a scenario for Hollywood screenwriters than investors. On the other hand, China’s decision to put a city of 11 million people on lockdown is a good indicator that they are taking the problem seriously and don’t want it to get worse.

As always, the real culprit here is uncertainty!

No one knows for certain how long the outbreak will last, how bad it will get, how far it will spread, or how it will impact economic growth. The instinct, is to shut the doors, draw the blinds, stick the money under the mattress, and wait for the storm to blow over. That’s exactly what we’re seeing some investors do right now.
 
Q: Is that what we should do?
 
Make no mistake, viral outbreaks can have an impact on the global economy. Certain sectors of the markets, like travel, energy, and retail, could be in for a few weeks – or months – of headaches. For example, let’s go back to the SARS outbreak of 2003. In that case, SARS is estimated to have cost the world economy $40 billion.3 The S&P 500 dropped 8.3% during that time, and many other stock markets suffered large losses, too.4
 
But there are two things to remember here.
 
First, the current outbreak is nowhere near what SARS was. Back then, nearly 800 people died in 17 different countries, and over 8,000 people were infected.3 As of now, this virus is neither as widespread nor as deadly. Furthermore, humanity’s ability to respond to it is much greater than it was 17 years ago. The situation can change, of course, but until it does, it’s important we keep a sense of perspective.
 
The second thing to remember is that the SARS outbreak only had a temporary effect on the market. After hitting its low in February of 2003, the S&P then went on a tear, finishing up 26% for the year.5 This is in keeping with how global events usually affect the markets: A short, sometimes steep slide as investors try to figure out what’s going on, followed by a longer climb. It takes long-term trends, or major changes to the economy’s fundamentals, to make long-term changes in the direction of the markets.
 
Q: So, what should we do about all this?
 
For the people directly affected by the outbreak, and for the heroic men and women combatting it, coronavirus is a serious issue. For us, this is an opportunity to remember why we shouldn’t overreact to headlines. While headlines can be unsettling, they very rarely require us to make changes to our investment strategy. The best thing we can do is to mentally prepare ourselves for more volatility should this outbreak worsen. Of course, mental preparation and emotional discipline are two of the best things we can practice as investors. But in the meantime, for us here at Canaccord Genuity Wealth Management it’s business as usual.
 
2 “Dow Drops Over 450 Points on Coronavirus Fears,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-slide-on-coronavirus-fears-11580119666?mod=hp_lead_pos2
4 “A History of Coronavirus Outbreaks and the Stock Market,” Yahoo Finance, https://finance.yahoo.com/news/history-coronavirus-outbreaks-stock-market-204520997.html
5 “S&P 500 Historical Annual Returns,” Macro Trends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns