By Deron T. McCoy, CFA®, CFP®, CAIA®, AIF®
Chief Investment Officer
First, breathe. Don’t act irrationally in the face of fear.
Second, let’s try to agree on what impact the Coronavirus will have. It will absolutely (but temporarily) impact your portfolio; it may impact your lifestyle; but it will not impact your life.
Third, the markets have just experienced the fastest 10% drop in history. And while the speed of the drop seems scary (as the end appears nowhere in sight), let’s not forget that markets were up 30% last year. Were you feeling fear last July 2nd when the S&P 500® broke to a new all-time high at 2,973? No. At present, we’re back to those same levels.
Fourth, the biggest coronavirus fear is the uncertainty surrounding it all. Will it come to the U.S.? Will it reach my neighborhood? Does that guy in the elevator this morning have it? There are a lot of unknowns, but let’s just acknowledge the elephant in the room so we can stop emotionally agonizing and start rationally dealing with the impact…
“The data is going to get a lot worse.”
Markets are selling off as investors try to analyze and digest the latest news centered on 1,261 cases in South Korea (expanding 29% day-over-day as of February 27th) and 453 cases in Italy (a 40% day-over-day increase); not to mention one case in Northern California where they can’t determine the original point of infection. In total, worldwide there are north of 85,000 cases and almost 3,000 deaths. Unfortunately, it most likely will expand out of Italy and Iran and come to our shores. It may even come to your neighborhood. But, spoiler alert: it’s not the end of the world.
Remember H1N1 also called the Swine Flu? If your answer is “kind of” then you’re not alone. The H1N1 Swine Flu infected 60.8 million people causing 274,304 hospitalizations and 12,469 deaths. And get this—those numbers are only within the U.S.! The numbers worldwide showed a staggering 151,000 to 575,500 estimated deaths according to the CDC. Even worse, this wasn’t 100 years ago before modern medical advances—it was a mere decade ago during 2009-2010.
But that was a once in a lifetime virus, right? Again, kind of. Fortunately, the death rates for others have been considerably lower, but just this century alone we have had Zika in 2016 (0 deaths), Ebola in 2014 (11,000 deaths), Avian Flu in 2006 (78 deaths), Singapore Dengue in 2005 (19 deaths), and SARS in 2002-2003 (774 deaths). Last century, the globe witnessed both the Hong Kong Flu in 1968-1969 (1 million deaths) and the Asian Flu in 1957-1958 (2 million deaths) – both exponentially higher death tolls.
Despite all these dire illnesses cropping up over the past twenty years, stock markets still managed to climb to an all-time high less than 10 days ago. In short, global pandemics don’t cause permanent damage—period!
Now, let’s consider the good news…
- In the coronavirus epicenter, Chinese cases are improving (albeit at an enormous economic cost)
- In nearby Singapore and Hong Kong, the disease growth rate is under control
- In our conference call with the Division Head of Epidemiology & Biostatistics at UC Berkley School of Public Health, the physician expert stated that 80% of cases are totally asymptomatic, with the majority of the rest exhibiting modest flu symptoms. All told, 98% of patients heal by means of their normal immune system. Deaths, as of now, have been confined to the elderly with prior health issues.
The Coronavirus isn’t this evil sinister poisonous gas. It won’t kill you if you look at it. Rather, it’s far more similar to the seasonal flu we deal with on an annual basis (not as contagious, but somewhat deadlier at ~2% mortality rate versus 0.1% for the flu). Consider that from October 1, 2019 to February 15, 2020 the CDC estimates there have been approximately 32 million flu illnesses, 16.5 million medical visits, 390,000 hospitalizations and 28,500 deaths in the U.S. Why do markets not react to these seasonal flu metrics? Because we deal with the flu every year and it’s not new news. At some point in the not too distant future, coronavirus won’t be new news either.
Longer-term, we will all be fine. If you’re not elderly and frail, your life won’t be impacted. Your lifestyle, however, may be – but only for a short period of time. Get used to this reality, and you will feel much better.
Shorter-term, you will experience volatility—both in your anxiety and in your portfolio. It’s the price investors must pay to earn higher rates of return. Recall, we urged investors in 2019 to fix their roof while it is sunny. We urged investors to get to a place where you aren’t a forced seller at the bottom. We urged investors to have three years of expenses set aside. We urged investors to also raise some dry powder so that we can turn the fear of recession on its head and actually embrace any selloff. We reminded investors that you create massive wealth at the bottom—not at the top.
The markets may still move lower. But they could then rip higher and you might miss it. You have to be right on both decisions. And if you do sell, consider what you will be buying. Do you really want to buy a 10-year Treasury and lock in negative real returns over the next decade? Actually, we are leaning towards doing the exact opposite. Not tomorrow, but the time may soon be upon us where we rebalance and embrace the recession—selling bonds to buy companies that will turn in massive profits in 2022.
 U.S. Center for Disease Control and Prevention, CDC.gov.
 Matthews International Capital Management, LLC (Producer). (2020). Coronavirus Update with UC Berkeley’s Head of Epidemiology and Biostatistics [Video webinar]. Retrieved from https://note.matthewsasia.com/uiZ000kQbA000G02SElKK70
 Data represents the midpoint of CDC estimated ranges.
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