The Coronavirus or COVID-19 as it’s officially known as has the entire global community in a panic.
The effects on the US Stock Market have been swift and severe. To understand what this illness is I went to the Centers for Disease Control (CDC) website.
The first thing you will see when you go to the section regarding COVID-19 is a warning that this is an emerging, rapidly evolving situation and CDC will provide updated information as it becomes available, in addition to updated guidance.
Here is the background of this virus as reported on by CDC.
CDC is responding to an outbreak of respiratory disease caused by a novel (new) coronavirus that was first detected in Wuhan City, Hubei Province, China and which has now been detected in 57 locations internationally, including cases in the United States. The virus has been named “SARS-CoV-2” and the disease it causes has been named “coronavirus disease 2019” (abbreviated “COVID-19”).
On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a “public health emergency of international concern external icon” (PHEIC). On January 31, 2020, Health and Human Services Secretary Alex M. Azar II declared a public health emergency (PHE) for the United States to aid the nation’s healthcare community in responding to COVID-19.
That same day the Trump administration said it would temporarily ban foreigners from entering the US if they had been to China within the past 14 days. This move, which in hindsight turned out to be the right move to try and minimize the reach of the deadly virus, was initially heavily criticized and labeled as xenophobic by many of Trump’s detractors.
One would hope that something as serious as a potential global pandemic would not be used as a political tool and that our elected leaders would come together to find the best solutions to help in preventing the spread of this virus. To quote President Obama’s former chief of staff, Rahm Emanuel, “Never let a good crisis go to waste.”
His political opponents and those in the media who hate him with the usual vitriol that they spew for the majority of his decisions have overwhelmingly criticized President Trump’s handling of the Coronavirus outbreak. They have such a low opinion of his ability to make policy in a way that is sound and rational that they fail to give him credit when his decisions prove to be the correct course of action.
Take for example Trump’s recent request for financial aid to deal with the virus. He sent a proposal to Congress requesting $2.5 billion to deal with the outbreak. According to TheHill.com Trump’s request included $1.25 billion in new funding, with the rest to be taken from existing health programs, including $535 million from fighting Ebola. Senate Minority Leader Chuck Schumer (D-NY) immediately blasted this request and said they should spend $8.5 billion to fight the Coronavirus, nearly three times the amount requested by the administration.
Schumer’s office noted that Congress previously appropriated more than $6 billion for the pandemic flu in 2006 and $7 billion for the “swine flu,” also known as H1N1, in 2009.
“This proposal brings desperately-needed resources to the global fight against coronavirus. Americans need to know that their government is prepared to handle the situation before coronavirus spreads to our communities. I urge the Congress to move quickly on this proposal. Time is of the essence,” Schumer said in a statement on Wednesday.
A senior administration official said the $2.5 billion request “was developed based on current and expected expenditures and input from our public health experts.”
No matter what action the president takes, my feeling is that he will be criticized. After all, this is an election year and even something as serious as COVID-19 will be second-guessed and used as a political weapon. Typical Washington.
On February 29, 2020, the Trump administration with guidance from health officials expanded travel restrictions to Iran, with advisories for Italy and South Korea. NBCNews.com reported that the travel warnings are intended to prevent COVID-19 from spreading as health officials in Washington State announced the first US death from the virus.
Vice President Mike Pence, who’s been placed in charge of the administration’s response, said the U.S. would keep out any foreign national who’s been in Iran within 14 days. The administration is also urging Americans not to travel to areas of Italy and South Korea that have been struck hard by the virus. The briefing came after three new confirmed or presumptive cases of the coronavirus illness contracted from an unknown source were reported Friday.
If you’ve been following the markets over the past month you will notice that the massive selloff did not begin until February 21st. On that day the Dow Jones Industrial Average (DJIA) closed at 28,992.41. The days to follow saw sharp declines of 1-3%. As of February 28, 2020, the DOW stands at 25,409.36.
Though it’s approximately 3,500 points lower than last week, it’s higher than the previous low of 24,815.04 on May 31, 2019.
You may begin to wonder what was the cause of that selloff and are there any correlations to the current economic instability we are experiencing. Clearly, this week’s massive selloff is tied to the Coronavirus. All the financial analysts that I’ve heard from covering the markets say the US economy is in great shape and we are not heading towards a recession. They note that many global corporate supply chains can be impacted which may harm future revenue projections. To get ahead of the potential panic that can ensue, hedge fund managers appear to have taken profits and partially moved out of equities and into more secure assets such as government-backed treasuries.
Even typical safe havens such as precious metals have seen a selloff.
To compare the financial impacts of the Coronavirus to last year’s volatility I did some searching and found an article posted by CNBC.com on June 01, 2019.
Note, this was written one day after the previous fallout in the DOW.
Fred Imbert wrote that drops in the S&P 500 like the one experienced in May are very common. He said that stocks pulled back sharply last month as investors fretted over U.S. trade relations with China and Mexico and worries over global economic growth. However, drops like this one are more common than people think.
Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, pointed out in a tweet Wednesday that 5% pullbacks in the S&P 500 have happened in 65 of the past 70 years. He also noted there have been just five years without such a decline since 1950: 1954, 1958, 1964, 1995 and 2017.
“We all remember what happened in the fourth quarter. That colors people’s beliefs when trade-war worries intensify,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. Also, “Post the Great Recession, people have been on the razor’s edge every time the market declines. I think we all have PTSD in some way.”
“That provides a backdrop for why people tend to overreact to when the market falls in a normal trend,” Schutte said.
While COVID-19 is new the massive panic fueled selloff that it inspired is not. Forbes.com has a great article from 2009 that covers this exact topic. “The time to buy is when there’s blood in the streets” is a phrase credited to Baron Rothschild an 18th-century British nobleman and member of the Rothschild banking family. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
This is contrarian investing at its heart–the strongly held belief that the worse things seem in the market, the better the opportunities are for profit.
Contrarians, as the name implies, try to do the opposite of the crowd. They get excited when an otherwise good company has a sharp but undeserved drop in share price. They swim against the current and assume the market is usually wrong at both its extreme lows and highs. The more prices swing, the more misguided they believe the rest of the market to be.
While it’s impossible for someone to predict the future and know how the markets will react to the latest global crisis or Tweet from Trump, the best thing you can do is to refrain from panicking. In this most recent decline that we find ourselves in, alongside Coronavirus, we are in an election year. The current front-runner on the Democratic ticket is a devout socialist whose economic policies, if implemented, would leave the country writing checks that the taxpayer can’t cash. His Medicare for all plan, Universal Pre-K and free college for all, as well as wiping out all student loan debt has a price tag that even his people can’t accurately put a price on. While those “giveaways” may sound appealing to some, it provides a stark contrast to the centuries of minimalist government intervention that have led to the rise of one of the greatest nations in modern history. Even the prospect of that bleak future should not cause you to panic.
What it should do is reinforce the investment strategy you devised when the world was not consumed with Coronavirus and hopefully provide you with some buying opportunities. After all, a loss is only a loss when you decide to sell. Otherwise, it’s a financial rollercoaster. You may be a little scared now, but things will calm down once the ride is over. Think long term and adjust your portfolio periodically and you should be fine.