Looking at how the coronavirus outbreak is affecting the financial markets

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By now, you’ve probably heard about the coronavirus outbreak in the Chinese city of Wuhan. As of this writing, there have been about 2,900 confirmed cases, with over 80 deaths.¹ Most cases have been within China itself, but the virus has spread to a small number of individuals in over fifteen countries.

As you can imagine, the outbreak has put global markets on edge. On Monday, the Dow dropped over 450 points due to concerns about the virus’s spread.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. We’ll explain what we mean with a brief Q&A:

Q: I’ve been ignoring the news. Can you tell me what’s going on?
Quick recap. Coronavirus is actually a group of viruses that cause respiratory infections. For most people, these infections rarely amount to anything worse than a common cold. But sometimes, certain strains can be either more virulent, more transmissible, or both. Remember the SARS outbreak of 2003? That was also a type of 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. All these things 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. We are not scientists, 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 natural instinct, then, 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?
No! While natural instincts are great if you’re trying to avoid getting eaten by tigers, they’re not so helpful with making investment decisions.

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 effect SARS had on the market was temporary. After hitting its low in February of 2003, the S&P then went on a tear, finishing up 26% for the year.⁵This 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. Generally speaking, 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. For that reason, 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, in rain or shine, in sickness and in health. But in the meantime, for us here at Research Financial Strategies, it’s business as usual. We hope it is for you, too.

As always, please let us know if you have any questions or concerns. We are always happy to be of service.
Have a great February!