In his 2007 book Black Swan, finance professor and former trader Nassim Nicholas Taleb wrote about catastrophic events that are impossible to predict. Earlier this week, Alibaba CEO Daniel Zhang used the term “black swan” to describe the spread of the coronavirus COVID-19, adding, “The outbreak is having a significant impact on China’s economy and may potentially affect the global economy.”
The COVID-19 outbreak dominated the headlines in the least week of February, and global markets took a dive, with the S&P 500 officially entering correction territory after registering a drop of more than 10%. But is COVID-19 a true black swan?
While there is no way to know with certainty the final scope of the epidemic, history can provide some guidance. John Buckingham of The Prudent Speculator reminded investors this week that “Stocks performed quite well during the 1918-1919 influenza pandemic and the 1957-1958 Asian Flu. More recently, the 2002-2003 SARS scare, the 2009-2010 Swine Flu outbreak and the 2014 Ebola hysteria all proved to be fine times for long-term-oriented investors to add to their stock holdings. And, HIV, which has purportedly killed more than 32 million and counting, traces its start back to 1981, right near the beginning of the great Bull Market.”
The Schwab Center for Financial Research concurs. In an article published on their website, “Spreading Global Virus Cases Shock the Stock Market,” it argues that “Past epidemics have tended to have a short-term impact on stocks.”
According to says Jeffrey Kleintop, Chief Global Investment Strategist at Schwab, “If governments can manage to contain the coronavirus, and it follows a pattern similar to other epidemics tracked by the World Health Organization in the past, the effect on markets could be relatively short-lived.”
Historically, the number of confirmed cases in epidemics has risen steeply for eight to ten weeks, and then peaked. Concurrently, stock markets dipped until the peak, and then ultimately resumed their long-term upward trend.
Of course, containment is the key, and government action has dealt with past epidemics relatively effectively. Given the interconnectedness of the world today, viruses like COVID-19 can spread more rapidly than ever, and the economic impact is difficult to isolate to affect only a few countries or regions of the world. A severe recession in China could result, but as Federal Reserve Chair Jerome Powell pointed out, “I think you can expect the Chinese government to do lots of things to support economic activity.”
“Fear makes the wolf bigger than he is,” as the German proverb goes. The great unknowns about what could occur outweigh what is likely to occur—if history is any guide. No one knows what will happen to the U.S. economy or stock market in the short term but evidence is abundant that the long term prognosis for stocks remains robust and durable.
Our philosophy about investing maintains that holding stocks through periods of turmoil and turbulence is often the most rational action that investors can take. On the other hand, any portfolio moves dictated by fear or panic are not likely to serve an investor’s long-term objectives.
As always, focus on the fundamentals and remember to buy companies, not the market. In the coming weeks, there are likely to be many bargains for watchful investors, solid companies with limited exposure to COVID-19-related factors, all selling at attractive valuations.
- DOUGLAS GERLACH
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