As of this writing, markets have fallen more than 10 percent from their highs, almost entirely in a panic over the coronavirus. It seems the American public has also shown signs of panic. Emergency food packs have disappeared from store shelves and some towns have objected to sick people getting treatment locally. While some investors are concerned that the virus will spread across the U.S., most of the market panic thus far centers on the economic ramifications of the virus. There are three concerns:
- First is that economies, China’s in particular, will suffer because of widespread sickness in the country and drag down the global economy, even if countries like the United States can contain the spread of the disease.
- Second is that interruptions in supply chains, again notably from China, will hamstring business around the world and set economies back, even those that can contain the coronavirus.
- Third is that business managers will hoard inventories, either of supplies or finished goods, which would create shortages in supply chains, even when there is no real shortage of the goods in question. (For this insight, I would like to thank a wise reader who asked about that possibility.)
This is not the first time markets have suffered in the face of — and fear of — pandemics. The spread of SARS between 2002 and 2004 created notable market retreats within what was otherwise a bull market. In 2009 an influenza pandemic took the lives of over 200,000 worldwide and caused momentary panic in a market that was already struggling to recover from the 2008-09 financial crisis. In 2012 the MERS pandemic produced market setbacks for brief periods. These experiences, and the current market reaction to the coronavirus, offer investors a lesson in how to respond.
The first thing to understand is that it is impossible to predict the extent or duration of events like these. Many commentators will try, and experts will offer estimates. While the experts’ guesses are better than those offered by the man on the barstool next to you, they are guesses nonetheless. Keeping this in mind, there are three scenarios about how things will work out, each with its own investment implications:
- The disease sweeps across the world, causing widespread death and disruption. This is the basis of the public fears that are presently gaining momentum. In this case, the investment implications are straightforward: You — everyone — have more to worry about in such a situation than wondering about your portfolio. Sell out, if you think that cash or treasury securities are safer in such a world than stocks or bonds. (Though they probably are safer, they are far from safe in that environment.) Whatever you do with your money, see to your health and that of your loved ones. The money is secondary.
- The disease runs its course, as did SARS, which was a far more ruthless killer than today’s coronavirus. In this scenario, the abatement of the health emergency will prompt a market rebound and an economic recovery as global supply chains quickly reboot. The present coronavirus, beginning as it did in China, may hasten the shifting of supply chains away from that economy, something that was already under way in response to the U.S-China trade war. (That is an interesting question and perhaps food for another blog post, but it is a separate matter from today’s panic.) Whether from China or Vietnam or elsewhere, the supply pipelines, literal and metaphorical, will quickly resume once this disease ebbs. If this is the case, the current market retreat presents a buying opportunity. Of course, purchases made in anticipation of such a rebound run the risk of suffering further declines should the virus’s worst effects linger. Therefore it might be prudent to make purchases gradually, in increments over time. This way you will be in position to enjoy the rebound should things change quickly, but will also have funds to buy at still lower prices should the disease take longer to run its course.
- The disease neither runs its course nor sweeps across the world. The virus becomes a fact of life, much like HIV did over a long period from the 1970s, when it first made its appearance. Should things unfold this way, the market would not offer the sudden rebound described above. It would instead recover more gradually as investors come to terms with this disease as an ongoing risk in life, like cancer or HIV or heart disease, or a long list of horrors that people are aware of and simply accept. To an extent, this scenario, too, would offer a buying opportunity, though it would not present a sudden market rebound described above.
The odds presently suggest that the market, as well as the economic responses, will mostly resemble the second scenario. This was the case with SARS, MERS, and the influenza pandemic of 2009. But because the behavior of viruses is so difficult to predict — impossible, in fact — any such response would come with considerable risk and should not involve a large part of any investor’s assets.
As this event continues to develop, I will update as necessary.