Note on Coronavirus Developments and Market Impacts
As the corona virus threat worsens and reported cases rise globally, we wanted to reach out to communicate our take on market implications. Extreme market volatility is always unsettling for investors, but it is important to view the recent market moves, including today’s decline, with a healthy dose of perspective. After a year like 2019 when the S&P 500 rose approximately 30%, a market pullback was primed and expected, as we discussed in our year-end market commentary. Nevertheless, it is impossible to time the pullback or predict its size and duration. This is especially true when the cause is a “black swan” event like the corona virus. We should expect at least 2-3 of these types of pullbacks on average each year in a normal market, due to a variety of causes.
In addition to viewing market declines in perspective generally, the corona virus has caused a global media-led panic that should also be put into perspective by cooler heads. In China, the epicenter of the corona virus outbreak, approximately 77,000 people have been infected with the virus and 2,500 people have died there, according to official reports. While undoubtedly a tragic consequence, in a country populated by 1.3 billion people, the number of reported cases represents about 0.006% of the Chinese population and the fatalities represent about 3% of that tiny fraction. Across the globe, cases in other nations are reportedly rising, however they represent an even smaller proportion of the respective population. Comparatively, in the U.S. so far this flu season, approximately 30 million people contracted the flu with approximately 30,000 deaths. This means that more than 10 times as many people have died from the flu in the U.S. than corona virus in China this flu season, yet no one is panicking about the U.S. flu season because it is nothing new.
The H1N1 swine flu pandemic in 2009-2010 provides a case study for context. H1N1 swine flu was a global pandemic that lasted from June 2009 to August 2010 when markets were already weak from the financial crisis. Approximately 500,000 people died globally from the H1N1 pandemic with over 60 million cases and 12,000 deaths in the U.S. The virus continues to circulate seasonally and is part of the typical flu vaccination. Since the financial crisis, the S&P 500 has returned over 400%.
Despite this perspective, there are clearly threats to global economic conditions from the corona virus. The most important and direct threat is the fact that this virus is dangerous, more deadly than the flu, and seemingly spreading globally without a cure. This causes people in the highly infected areas or subject to quarantine to stay home from work and refrain from travel and commerce. This weighs on economic growth in places like China, obviously, but given its importance for the global economy, the rest of the world as well.
A secondary impact is that uncertainty bruises investor confidence and leads to negative market sentiment. The extent of the virus’ eventual impact is unknown at the moment and markets abhor uncertainty. Like those consumers in infected areas, many investors may decide to stay on the sidelines until the situation is under control, leading to a spiraling loss of confidence in economic conditions and financial markets. Specifically, stocks of companies with high exposure through sales or supply chains to China and emerging markets, like some industrial and consumer companies, as well as transportation and tourism stocks, may be impacted the most. Interest rates will remain low as investors flee to the safety of government bonds, particularly U.S. treasuries.
In our view, markets such as the past few days are buying opportunities for long-term investors. Short-term traders who have substantial equity exposure and a lot to lose from further market declines may panic sell at times like this. Regardless, even after today’s decline, the S&P 500 is just 5% below its all-time high hit less than a week ago. Outside of the corona virus impact, the U.S. economy is strong. That being said, we are not clairvoyant and cannot predict the full duration or extent of the economic impact from this crisis, but for the sake of everyone affected we hope and expect our political leaders and medical experts will contain the situation in the near-term. In the meantime, we will focus on investing in fundamentally sound and attractive businesses when their equity appears attractive for long-term investment and refrain from any panic decisions based on temporary developments.