This past week we have witnessed the significant decline in the market indexes in response to fears of repercussions to the world economy from the spread of the coronavirus. As in almost every sharp market decline of the past, fear commands the human emotion to panic and in the case of investing, sell now and ask questions later. More recently as technology makes trading simpler and allows mathematics to control trading decisions, market moves are quicker in either direction.
During these times of panic, we need to take a step back and examine the factual information versus what is presented on social media and 24/7 news channels. As of this morning, there have been approximately 83,000 cases of the virus reported and 2,800 fatalities. 99% of the cases are in China. The health officials at the World Health Organization estimate the fatality rate at about .7% for cases outside of China. This flu season alone, reports are that in New York City there are 3,000 flu cases reported each week. Total fatalities in this flu season have exceeded 41,000 in the U.S.. By no means do these reports minimize this virus or its dangers, but it does help put it in perspective. The CDC recommends to continue to be vigilant with hand washing and to stay home if sick.
Regarding the economic impact that will be felt, no doubt supply chains are being interrupted and corporate profits will be negatively impacted for a period. With large numbers of people quarantined, obviously many products will not be consumed or purchased if one cannot get to the stores. But being restricted from going to the Apple store to buy that new iPhone or computer does not mean that it will not be purchased next week or next month when able to.
We expect profits to be delayed during this period of panic, but not eliminated. The economy continues to be very strong and the world governments have committed to make credit available during this time to help businesses get over the temporary hurdle.
Investing in good companies across the various investment sectors is strategically important in panics such as these. Investors that have fled stocks for the safety of bonds are actually driving up those prices which helps with the assets allocated to bonds in your portfolio. Additionally, the discounted equity prices may provide a good opportunity to fund 2019 and 2020 IRA contributions as you prepare your income tax returns.
The current disease outbreak is not totally unprecedented however. Similar short-term declines occurred during the SARS outbreak in 2003, MARS outbreak in 2013, Ebola outbreak in 2014, and Zika in 2016. In each case the S&P 500 was substantially higher six and twelve months later which shows Wall Street’s reaction to such epidemics is often short lived.
By technical measurements, the equities are in severely oversold territory. As this situation plays out and cooler heads prevail, we believe the long-term bull market will continue.
The Lesjak Planning Team