The Dow Jones has lost 2200 points (-7%) in the past week. The reaction is due to the deadly viral outbreak of COVID-19. There are now about 80K cases of this virus in 32 countries and 2600+ deaths.
The social-media-driven news cycle, the interconnectedness of global supply chains and a pricey stock market, make Wall Street more vulnerable to a black swan. Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons.
The severity of the virus, ultimately, will dictate the market’s reaction and just because indexes had managed to shrug off the contagion from outbreaks in the past doesn’t mean that will be the case this time. There are also concerns that the virus may spread quickly beyond China, causing economic and market damage. Potential disruptions to China’s economy and factories could be significant because the country’s share of the world economy by some measures is at 19.3% in 2019!!
What does History tell us?
Historically, however, Wall Street’s reaction to such epidemics and fast-moving diseases is often short-lived. See the enclosed charts.
SARS resulted in a total of about 8,100 people being sickened during the 2003 outbreak, with 774 people dying. Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus — a fast-moving pathogen, also known as H5N1. The market gained 18.36% in the following 12-month period.
So what do we as investors do now??
First, let's get the obvious point out of the way!! The financial ramifications from the coronavirus are impossible to pinpoint because no one knows how long this will last or how far it will spread. The virus is too unpredictable to make accurate assertions about the markets or global economy. And even if we did know the full extent of the potential damage, you never know how the market will react to the news. Any prognostications as to the economic or market impact at this point would be complete guesses. The headlines are scary and the last 2 days' market declines scare us even more. But the economic foundation remains reasonably solid around the world. The epidemic is a shock, but it is not likely to derail the recovery. The WHO while recognizing the risks, has not declared a pandemic, indicating that the risks remain contained.
"Volatility is inherently frightening and being frightened means that we are paralyzed", quoting Dan Ariely, professor at Duke. Be focused on your goals and DON'T check your investments every minute!! You are only going to feel miserable.
We certainly need to pay attention! But as of now, watchful waiting continues to be the proper course. Once again, remain calm and carry on. For those investors sitting on cash, such shocks are a great opportunity to invest for the longer term. Making changes to your investment stance based on news headlines is rarely the right move. But sometimes the news headlines can provide a dose of reality for those investors who miscalibrated their tolerance for volatility and potential losses in the markets.
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