Coronavirus – The Market Says It’s Supposed to Get Worse

The year 2020 has started with quite the lineup of geopolitical issues.  The one stealing all eyes as of late has been the Coronavirus.  This past weekend, news got worse.  South Korea, Italy and Iran all reported new and escalating cases with Italy now reporting to be the largest impact area outside of China.  All these numbers are sure to change by the time you read this, but the fact remains that Coronavirus is not going away.

Market Reaction

Naturally, if that’s the case and we believe it’s not going to go away in the short-term, what should you do?  The first thing to think about is what does the market think about the virus?  In effect, the market is a voting machine tallying up all people’s concerns, including your own, about Coronavirus and how this will impact the market.  So, what you are thinking is accounted for, and what is priced in is the idea that this is going to get worse before it gets better.  More people are going to contract this virus and it will grow into a large sum before it gets contained.  The reality must be even worse than this negative projection for markets to go down further from here.

Will this affect the economy?  Some, but how much depends upon a couple of things.  In economics, we all know about supply and demand.  If we look at this issue from a demand perspective, we have to think about what is going to happen as a result of this virus:

• Demand Deferral – Demand in the short-term could come down, leading economic growth to be slower than previously predicted before the virus. However, a deferral means slower now and faster later.  If you were thinking about buying a new car, or iPhone, or whatever product that might be experiencing a short-term supply chain issue, well maybe you can’t or won’t buy it right now, but at some point, you will.  Your demand hasn’t permanently gone away, the timing just changed.

• Demand Destruction – Are you planning a trip to Italy? Does this outbreak make you think twice?  If you cancel your trip this year and had planned to take one big vacation a year, does that mean next year you do two big trips, or just one?  In many cases, you end up adjusting the future to be just one and skip this year.  That is an example of the destruction of demand and leads to an economic slowdown without the bump up that we see from demand deferral. Most of the impacts seen so far have not spread this far, but that is the fear.

Manufacturing and travel will certainly be impacted by the above.  However, when considering Coronavirus, it’s important to remember that we’ve seen this before.  In the 2000s alone, we can name several outbreaks: SARS, Swine Flu, and Ebola.  What did the tolls look like of these pandemics compared to what we know today?

And how did the market behave around these pandemics compared to the volatility we are seeing now?

Without exception in the cases noted above, the markets had moments of negativity, but over the course of the year, while health officials were trying to control the outbreaks and markets were surrounded by uncertainty, markets moved up.  Will this happen again with Coronavirus?  We simply don’t know, and no one can for sure.  But we do know two things:

• First, a pandemic, and the worsening of a pandemic, is, unfortunately, something that has happened before, and markets typically don’t go down for this reason alone.

• Second, what’s important to note is what else was happening in the economy during these prior outbreaks. In 2003, we had just come out of the recession and the tech bubble burst a year prior, so the markets were cheap.  Same in 2009 post the Great Recession. In 2013, we were now starting to hit our “stride” with the global economic recovery, so markets were humming along.

How about now?  Most of the data still shows growth, just at a slower pace than the last couple of years.  That can still mean good things for stocks.  And if it doesn’t?  That’s what your bonds are for.  Just look at how well those are performing in times of stock market strife, like Monday.  Your portfolio is already built with the idea that uncertainty is the only certainty out there.  Negative things are going to happen.  Ones we expect and ones we don’t.  So, the occurrence of one of these uncertainties never feels good, but rest assured, it’s factored in.

For more information related to how the markets are being affected by the Coronavirus:

Coronavirus and Market Volatility Revisited

Coronavirus Uncertainty Leads to a Bear Market

Handling the Hard Times

Thoughts on The Downturn