A 3D print of the virus particle that causes COVID-19. Image courtesy the National Institute of Allergy and Infectious Diseases (NIAID).
Americans who pay attention to the news may find reports about the spread of the novel coronavirus increasingly unnerving. But in both public health and investing, it pays to stay calm in the face of uncertainty.
The stock market fell this week on bad news about the spread of the coronavirus first identified in Wuhan, China, with Italy and South Korea reporting new infections. As of Wednesday, the S&P 500 was down about 8% from its all-time high a few days prior, with much of that drop coming within a 48-hour period.
Circumstances have changed since Larry Elkin wrote about the coronavirus now called COVID-19 earlier this month. Yet those changes do not undermine his central point. Transient events like COVID-19 can be life-changing on an individual level. But when it comes to long-term investment returns, history suggests their effect is limited.
This week, the Centers for Disease Control and Prevention warned that some level of spread of COVID-19 in the United States is inevitable. As of Tuesday night, there were 57 reported cases here, all but 14 connected to a single cruise ship. Health and Human Services Secretary Alex Azar said this week, “The immediate risk to the general American public remains low. But, as we have warned, that has the potential to change quickly.”
As the U.S. braces for potential disruptions, Europe is coping with new outbreaks, most seriously in Italy. As of Wednesday, COVID-19 has caused 2,770 confirmed deaths worldwide, the vast majority in China. While the situation is inarguably serious, it is worth remembering that this count is still a mere fraction of the deaths caused by the flu each year.
I don’t want to minimize the potential public health impact of COVID-19. Many people worldwide have been seriously ill and others have lost loved ones – just as in any serious outbreak. It is also important to bear in mind that evaluations can change as we gather more information. A recent column in The Wall Street Journal suggested that the interconnectedness of our modern world and technological advances of the past few years mean that no one can be sure of COVID-19’s ultimate effects, on investments or in general.
No one, including me, can guarantee how this will all play out. Epidemiologists say that the slowing spread in China could mean we are at a turning point, or it may reflect patchy information. One hypothesis is that COVID-19, like the flu, might prove to be seasonal and naturally abate in the spring. But it is too soon to know if that will prove accurate. How many people will contract COVID-19, and how many of those cases will be serious, are questions we simply can’t answer right now.
Yet my clients are not asking me for health advice. They, like me, can read experts’ suggestions that they wash their hands often and avoid going to work or school if they feel ill. Instead, they want to know whether COVID-19 will create a stock market meltdown. And while I can’t guarantee that this will all be over soon, so far I don’t see any evidence that investors should brace for the worst.
In fact, if the stock market declines further due to virus fears, it may create some attractive investment opportunities. The classic advice to buy low and sell high still holds true. A market dip can essentially mean stocks are on sale compared to their true value. On the other side of the coin, some investors may have invested in stocks too heavily during the long period of market tranquility. This jolt of turbulence could be a good reminder to recalibrate your portfolio’s level of risk. The market hasn’t fallen so far that it has become unreasonable to sell, if reducing your stock exposure is something you should be doing regardless.
In the short term, extended business shutdowns, especially in China, certainly will affect the global economy. But in the long term, it’s not hard to envision things getting back on track. All comparisons will be imperfect to some degree. Based on what is publically known, severe acute respiratory syndrome (SARS) was deadlier, but more contained. The flu epidemic of 1918 was global, but existed in a world without commercial flight or modern supply chains. History is a guide, not a guarantee. But even severe outbreaks generally don’t cause market crashes. The AIDS crisis of the 1980s and ‘90s, horrific as it was in human terms, made no discernible difference to the stock markets at the time. COVID-19 is not AIDS by even the most hyperbolic comparison.
Investors should also remember that the U.S. Federal Reserve is unlikely to stand by if markets take a dire turn, whether triggered by the outbreak or anything else. The Fed would probably flood markets with cash or cut interest rates – or both – if it judged that the situation had become untenable.
It’s human nature to want to take action in an uncertain situation. For some investors, this market jolt may create opportunities that makes action reasonable. But in general, action for the sake of action achieves little. We at Palisades Hudson continue to watch and wait; most investors will be best served to do the same for now.