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Andy Michael | Feb 26, 2020

While the coronavirus has been in the news most of 2020, it didn't truly hit the markets until Monday, February 24 when the Dow Jones fell over 1000 points and the S&P 500 had its worst day in nearly two years. As governments, businesses, and investors begin to grapple with how to respond we will address three questions about the coronavirus's impact on markets.

The coronavirus has been in the news for weeks. Why did the market react now?

In the weeks prior to February 24 it appeared the coronavirus was largely contained to China. Now, South Korea, Japan, and Italy report significant numbers of infections and are making serious efforts to contain it, including travel bans and quarantines. The market fears the virus is spreading, which could lead to economies and businesses slowing down due to production and supply chain disruption as well as a drop in consumption. In short, it's not the coronavirus itself that global markets fear, but rather the economic slowdown it can create.

What are the possible scenarios looking ahead for the markets and coronavirus?

Given no one could have predicted the coronavirus outbreak in the first place, it's challenging at best to predict what might happen going forward. But in the spirit of giving our best objective guesses, here are two paths that could play out.

Path #1: Coronavirus is contained/cured > becomes a blip on the market's historical path. Here are three historical examples of where Path # 1 was the case:

1. 2014 Ebola – The S&P 500 fell by 7.5% as fear of Ebola spread. The market fully recovered the losses within two weeks as fears subsided.
2. 2009-2010 Swine Flu – Over 203,000 deaths were reported during the swine flu outbreak, yet markets were positive those years as the economic recovery from the financial crisis dwarfed the impacts from Swine Flu.
3. 2003 SARS - The SARS outbreak in China included CDC travel warnings and spread to 29 countries. The US markets were not materially impacted at any specific point by the SARS outbreak.

Path #2: This time is different > coronavirus continues to spread > travel, consumption, and commerce slow > triggering a global slow down or recession (think Olympics cancelled, for example).

While we believe (and hope) Path #1 is more likely given greater historical precedence for that outcome, we must acknowledge that Path #2 does exist. Given these paths, what should we do about it in my portfolio? Whether we are discussing unexpected shocks like terrorist attacks, natural disasters, or disease outbreaks, our approach remains the same:

1. Start with your goals – the why behind your investing
2. Own cash reserves and conservative investments that match your capability and tolerance for risk
3. Think in decades for long term growth and stay the course

Please contact us if you have deeper questions about the coronavirus or the impact to your portfolio.

Andy Michael, CFA
Portfolio Manager

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