Coronavirus: What Should Investors Expect?

Written by John B. Cox, CFA, CAIA on February 24, 2020

Type “coronavirus” into a Google search, and you’ll see that there are about 1.5 billion results. Clearly, there are concerns about the spread of the virus and the impact it might have on the global economy and markets. At first, there was an expectation that it would be contained in China, but now the residents in South Korea, Iran, Italy and other countries are worried about contracting this disease that has led to almost 3,000 deaths and will likely end up being much higher than that.

The economic impact is not fully known at this point, but companies such as Apple have already lowered their revenue forecasts for this quarter due to supply chain interruption (the process of having many different companies involved in putting together Apple products) caused by the virus. The travel industry and those companies who have significant exposure to Chinese consumers will experience financial difficulty. Extreme projections are that the global economy could take a $1 trillion hit, causing more than a 1% impact on worldwide Gross Domestic Product (GDP). While global central banks, like the US Federal Reserve, have some ability to mitigate the economic damage, they have fewer tools than in the past, given historically low interest rates and historically high balance sheets.

What does all of this economic reaction mean for the stock market? Since the market first responded to coronavirus on January 21st, 2020, the decline has been about 5.0%, including today’s sell-off. To put this fact into historical context, previous health scares have caused declines ranging from 5.0% to 15.0% and have typically lasted anywhere from two to six months. SARS (2003) and Zika (2015) caused the biggest downturns, while the Avian Flu’s impact (2004) lasted the longest. It is human nature for investors to wonder if they should do anything in response to the market decline caused by the coronavirus. Coincidentally, one of the greatest investors of all time, Warren Buffett, was interviewed on CNBC this morning; not because of the virus, but because he released his annual letter to shareholders over the weekend. The letter is one of the most widely read financial commentaries every year and can be obtained on the Berkshire Hathaway website. To summarize Buffett’s comments this morning, he said that, while Berkshire Hathaway would likely be buying stocks today given that they are sitting on a pile of uninvested cash, most investors should essentially ignore this short-term news and remain focused on a 10-year or more time horizon.

While we will continue to monitor the current events, we believe this is one of those times to be patient and not let the fear caused by the media to affect your long-term investment plan. This is a very sad and scary time for those countries and people who are directly impacted by the virus, but it is our view that investors should not take any action. Please let us know if you have any questions or would like to discuss your current investment allocation.

John B. Cox serves as a Member and as Chief Investment Officer with Waverly Advisors. Click here to learn more about him or to reach out to him directly.


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