When you see news anchors broadcasting while wearing flu face masks and the Dow Jones is down 1,000 points, it’s unsettling. The coronavirus that started in China has made its way across Europe. There are cases in the US, and, as of this week (Feb 24th), markets have started to react in a significant way – to the downside.
The Bad News
There is a very real human toll with COVID-19, with the death toll now north of 2,500 and reported cases north of 80,000. However, stock markets are reacting to the economic toll that is hitting China which will have implications for global economic growth. Recent data suggests that due to the quarantines in China (over 750 million people), economic activity has slowed. Coal consumption (for power plants and manufacturing) is down over 40%, and it has been reported that less than 35% of people who should have returned to work post the Lunar New Year have not done so due to travel restrictions. We are of the viewpoint this will likely be temporary. But, we are naturally unsure about the timing and final magnitude when all is said and done.
The Good News
We have an army of the very best minds working on a solution. Here in Atlanta, leading scientists at the Center for Disease Control are working tirelessly as a part of a global team of experts to get the coronavirus under control. Some of the best biotechnology firms in the world are also devoting substantial resources to find a solution. Historically, when all hands-on deck situations arise, a solution is found.
This may take time and the human toll could certainly rise (which nobody wants to see happen), but epidemics of this nature are nothing new, and, over the course of history, markets and economies have typically been resilient despite significant volatility on occasion. This is the case over the last 20 years where we have seen multiple heath epidemics play out. The Avian Flu in 1997, West Nile virus of 1999, SARS in 2002, The Swine Flu (H1N1) in 2009, MERS in 2012, the Avian Flu of 2013, and the West Africa Ebola Virus in 2014. In each instance, despite drawdowns in some cases of 10-15%, US markets were higher six months later.
We don’t know exactly when COVID-19 will peak, or when the toll on markets and economies will stop – but we do know that these outbreak events eventually subside, and we find a solution. When the news starts to improve around this situation, which we have utter confidence that it eventually will, an improving economic picture will lead to a coinciding market recovery.
In the meantime, know that the kind of companies that we own at CIA for our clients are meant to withstand this type of event over the long haul. Additionally, safety assets such as US government bonds and quality corporate bonds are owned to be a ballast during days and weeks like this. A combination of quality stocks and bonds that provide steady income through the volatility gives us the confidence to get through rough days and weeks like we’re seeing today. Over time, markets are resilient. Remember that, as an investor, we must be resilient too.
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