Coronavirus Threat to the Economy is Real But Not as Scary as 2008!
This week is turning into an utter bloodbath for stocks. As fear of Coronavirus spreads, markets are speculating on the extent of the economic fallout. As I pointed out in previous posts, the market is having a hard time with this, because these events are so outside the norm. Markets don’t really know how to price in economic fallout from a pandemic. And really, how can we? We don’t know how long it will last. We don’t know how far and wide it will spread. We don’t know how it will impact economic activity. Markets hate this type of uncertainty, and it sure has shown over the last few days. The S&P 500 index has shed over 10% from its record high – which was ONLY A WEEK AGO! Wow.
And we are likely not done yet. Stocks were very richly valued when this correction began. That means they were susceptible perhaps to any disappointment in corporate earnings. But now suddenly we have the prospect of companies all across the globe seeing sales turn down, and profits evaporate. That is a huge change in assumption regarding the most basic component of stock price – corporate earnings. How far stocks could fall is anyone’s guess – but I think given the raw fear emotion this situation can generate, another 10-20% fall in the stock averages would not surprise me. (warning - my crystal ball is broken, so don't put too much faith in my predictions!)
That sounds kind of scary, but in fact, I find myself more sanguine regarding this situation than I was during the midst of the financial crisis of 2008. The reason is that I feel as if we already know the endgame here. We still don’t know how fast or far the virus will spread, and we don’t know just how much short-term economic damage will be wrought, but we do know that eventually this will go the way of swine flu, SARs, etc. In other words, the epidemic will either come to a natural end, perhaps just peter out over the summer like a typical flu, or humans will defeat it with a vaccine. HHS has told us that a vaccine may take some time to develop – but develop it they will. Once the virus is out of the picture, we can hopefully get back to business.
In contrast, the financial crisis at its peak provided no clear exit. It appeared for a while that our entire financial system, the system on which the world economy depends, was about to implode. It was uncertain how things would end. There was talk about another Great Depression – and we were not all that far from the brink. The policies which rescued us from that brink had never been used before (TARP, QE, etc.) – so even as the medicine was being prescribed, there was much doubt whether it would be effective, or sufficient.
Now of course none of that is to downplay the threats to human health, etc. - I am a financial planner so my focus is solely on the likely impact to my clients financial plans.
So while I really don’t know where this goes from here, and there is of course a risk that if the virus spreads globally and persists for a long time, the economic damage could be worse than I currently expect – but at least we (think we…) know how the show will end. There is some comfort in that.
What do we do as investors? Wash our hands, practice good hygiene, then just survive the wild ride til we come out the other side, that’s what. Markets will inevitably overreact (they always do) – and it is never good to get involved in the market feeding frenzy on days like this. If your long term allocation is appropriate, all this commotion will be just another blip on the historical performance chart 3 years from now.
Disclaimer: I don't have any special insight into global epidemics. The future is as always, uncertain, and any commentary I make here on the future direction of markets is merely speculation. Even I don't act on my own predictions - so suggest you don't either!