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January Investment Climate and the Corona Virus

February 01, 2020

January Started Out Strong - Then Came the Corona Virus

While markets held firm for most of January, at month’s end fears related to the Coronavirus overwhelmed what was otherwise appearing to be a modestly stronger global economy and continued stable growth in the US resulting in a modestly down month for stocks.  This after 2019 just seemed like an endless march of positive monthly returns for stocks.  

Investors in more conservative portfolios may have fared a bit better than growth investors for the month, since bonds have rallied strongly on the “fear trade”.   Still, despite a rough day to end the month this Friday, losses for the month as a whole were fairly modest. 

So what to make of the Corona Virus and its impact on investors? 

Until this virus plays itself out, markets will likely be turbulent.  Why?  Well, markets are pretty confident in their own ability to parse economic data and project into the future.  They are also pretty good at deciding which geopolitical events matter to the economy, and which are just useless noise.  But health concerns and contagion are another thing.  The market simply doesn’t know how to quantify the economic impact of a viral epidemic, so stocks will likely overreact (either up or down) to the headline of the day..  So we can be pretty sure that markets will be volatile in the coming weeks as we (and the markets) try to figure out what will happen next.  The biggest worry is that Chinese economic output slows for an extended period, which will cause knock on effects around the world as companies run short of parts for their own manufacturing, retailers run short of product, etc.  So far, market impacts have been rather modest, especially considering how robust recent gains have been.  But the longer this drags on, the more significant the economic impacts. 

Coming into this as we entered the new year, we have rebalanced most of our portfolios to take some of the 2019 profits (it was a very good year) off the table.  So we are exactly where we want to be for our long term investors, but it is still likely to be a bit of a wild ride over the coming days / weeks.  In the longer run (where we should all be focusing), this virus will eventually run its course, just as did SARS. Ebola, Zinga, etc., and life will again return to normal. 

Again, I am not saying there won’t be economic impact.  Pain will certainly be felt in the short term, since virtually the entire Chinese economy (2nd largest in the world) is screaming to a virtual halt.  But this epidemic will pass, and life will move on, and this will become another blip on the historical chart of stock market history. 

As for the efforts to contain the virus, I am quite impressed with what is happening in China.  I have seem recent pictures of the streets of Shanghai, one of China’s largest cities, being virtually deserted.   In the cities at the center of the outbreak, police roadblocks are everywhere – you are not allowed to venture out on the street at all.  Droconian, perhaps – but I can’t imagine a more appropriate response to controlling a contagious disease outbreak.   

Eventually, this too shall pass.  Once again – investors need to look past all the little crises of which life on this earth is comprised of and look to the long term.  Crises come and crises go, but long term investors have always been amply rewarded for looking the other way.  No reason this crisis should be any different.