As many of you are already aware, last week the DJIA had its worst week since the 2008 Financial Crisis, dropping more than 3600 points in five days. As most of you should also know, the accounts that you have with our firm do not lose money amid market declines, but hold their values from your most recent anniversary date without a loss. Not only is your principal protected, but each year’s accumulated gains are also locked in and protected from loss.
At this writing, no one knows with any certainty what the impact, both economically and demographically, will be on any nation currently dealing with a coronavirus outbreak. However, there are some important things to keep in mind as we look at what we do know. What we know is that the coronavirus is related to the common cold. We know that the mortality rate is approximately 0.9% of those affected, lower than that of influenza on an annual basis. We know that the overwhelming majority of those infected recover within a matter of weeks, and that over 45,000 of those diagnosed with the illness have already recovered. We know that those who do not are typically the same demographic of those who die from influenza every year: small children, often ones without access to healthcare, the frail elderly, and people with already-compromised immune systems or diseases.
As to what the continued impact is likely to be on the stock market, this article in MarketWatch has an excellent chart, rich in context and perspective. It looks at all of the outbreaks of various viruses and diseases over the last 40 years, and where the stock market was at 6 months and 12 months after diagnosis/discovery. In almost every instance, the stock market recovered its initial losses, and was substantially higher, often by double digits, than where it was when news of it first broke. This was even the case during the Eboli outbreak, a disease with a whopping 90% fatality rate. Six months after the initial outbreak, the S&P 500 was up +5.3%, and after 12 months it was up +10.4%, comfortably ahead of the market’s 8.3% average annual return of the last 120 years.
As I was sharing with one of our clients on Friday, if something like this was going to impact our economy, better that it do so now, amid the strongest economy we’ve ever had, than amid weaker economic numbers. The coronavirus will no doubt lead to a slowdown in global growth—not because of a high fatality rate—but rather because the fear of the unknowns surrounding it will cause closures, employee absences, and a probable reduction in economic participation. Because so much of our American economy is dependent upon Chinese manufacturing, supply chain disruptions from China will be the biggest culprit. Happily, Tim Cook, the CEO of Apple, a company that manufactures many of its products in China, just announced the return of almost all of Apple’s Chinese workforce last week. They are up and running, and fully operational again. We suspect that supply chain disruptions, like those experienced by Apple, will be short-lived.
While “hope is not a strategy”, we believe that circumstances like these will soon cause investors to realize the enormous buying opportunity last week’s selloff represents, amid an otherwise strong American economy. One silver lining of the current international flight to safety has been that the yield of the U.S. 10-year treasury note reached record lows just this morning, causing analysts to speculate that a wave of mortgage refinancing could have a sizeable economic benefit within the next 2-5 months. Pharmaceutical firms rushing to develop an antiviral for coronavirus are chasing a “gold rush” in that sector, with the winner likely to benefit significantly from their success. Counter these bright spots with the closure of theme parks, the impact on the travel industry, and the possible closure of the upcoming NCAA Men’s Basketball Tournament—and even possibly the Tokyo Summer Olympics—and it’s obvious that no one can say with any certainty where this is going.
Until then, doctors advise prevention in the same way that we are encouraged to avoid the flu; wash your hands often, avoid public handrails and door knobs, the shaking of hands with those who appear to be ill, and not touching your nose or eyes with unwashed hands. Simple common sense may be all that’s required here, until an antiviral can be developed in time for next season.
Finally, for our clients, please remember that your monies are safe from sell-offs like the one underway now, regardless of how severe. In 2007-9, the Financial Crisis caused losses of -55% and -57% in the NASDAQ Composite and S&P 500, the worst declines since the Great Depression. While nothing even approaching that is underway now, it’s comforting to know that not a single one of our nearly 700 clients lost money in their accounts at that time—and that when the recovery began, they were able to benefit from it.
For those with whom we’ve met in the past who have not yet become clients and are concerned about the volatility in their portfolios elsewhere, this might be the time to revisit a conversation about mitigating risk and guaranteeing a portion of your retirement savings for lifetime income. Feel free to call our offices if you have any questions.