Is It Time To Vaccinate Your Portfolio From The Coronavirus?

(Note: This blog was posted at 2:45 pm on January 30, 2020.)

  • The coronavirus death toll rose to 170 and confirmed cases soared past 7,700, posing a potentially serious threat to the global economy.
  • Pursuing an unproven and hastily developed vaccine in hopes of inoculating your portfolio from effects of the virus may be more harmful than the virus itself.
  • Our long-term prognosis for the markets is a full and complete recovery.

“The economic impact [of the coronavirus] will depend very much on the behavior of the illness itself, how fast it spreads, who it affects, and how quickly the contagion will run its course.” Gerry Rice, International Monetary Fund spokesman.

The coronavirus death toll has risen to at least 170 (all in China), and confirmed cases have shot past 7,700, creating what may turn out to be a serious threat to the global economy. U.S., Asian and European stock markets have all slumped amid the mounting evidence that the influenza is spreading. Asian economists have started lowering their GDP forecasts, as the virus has begun disrupting company supply chains and slowing consumer activity. Businesses in China have begun to suspend operations, and governmental authorities worldwide have begun to impose travel restrictions.

Investor fears about the effect the outbreak may have on the global economy has caused publicly traded stocks to lose an estimated $1.4 trillion in value since mid-January.  Before the outbreak began, stock markets around the world had been soaring on prospects that lessening trade tensions would lead to stronger economic growth

As is often the case, bad news for stocks has been good news for government bonds, as some investors place safety ahead of all else. The outbreak has pushed the 10-year Treasury yield back to around its lowest level since Oct. 10, and yields on the equivalent maturity in Japan and Germany have edged down as well.

It’s impossible to predict the ultimate effect the coronavirus will have on the global economy. Recent developments include:

  • The number of confirmed cases has surpassed 7,700 worldwide, most of them in China. (No one outside of China has died from the disease.)
  • The World Health Organization met today and has declared a global health emergency.
  • The Russian government ordered its border with China to close.
  • President Donald Trump appointed a task force to coordinate the U.S. response to the coronavirus outbreak, as at least five U.S. residents (all of whom had recently traveled to China) are infected, and 165 are under investigation.
  • The first human-to-human infection in the U.S. has been reported on Thursday (January 30).

As scary as these developments might be, from an investment standpoint it’s important not to overreact. As is often the case, history can provide some valuable perspective. 

  • While the spread of the coronavirus is almost certainly going to continue, this year’s flu season has killed 8,200 people, with at least 15 million cases — and that’s just in the U.S.
  • So far, the mortality rate of those infected remains low by historical standards (~ 2.3%).
  • The pharmaceutical industry is working on a vaccine, with plans to begin human trials soon, perhaps as early as this summer.
  • Previous viral outbreaks, such as the Ebola, Severe Acute Respiratory Syndrome (SARS), and Middle East Respiratory Syndrome (MERS), were all successfully contained. Moreover, health officials learned a lot about how to contain viral outbreaks from those events and public awareness seems to be much higher now.
  • According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76%.

Unfortunately, history provides a clouded view of the future.  Moreover, comparisons of the coronavirus with previous viral outbreaks may be less relevant given that China’s standing in the global economy has grown substantially.  The fact that the U.S. stock market was able to brush aside past outbreaks doesn’t mean that it will this time. Ultimately, it’s the severity of the virus that will determine the extent of the negative impact the virus will have long-term, if any.

Situations such as this highlight the benefits of using rules-based tactical asset allocation strategies to manage your portfolio.  Rather than acting out of fear, panic, or other harmful emotions so many investors fall prey to, the extensive research and market data that underlies a quantitative investment approach can provide the discipline and confidence needed to stay calm as the emotional roller coaster rises and falls.

Needless to say, I will be keeping a close eye on new developments, and will post a follow-up if something occurs that causes me to change my view.  As of right now, my suggestion is to “Keep calm and Carry on”.

Thank you for reading,

Mr. Market Commentator

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