The recent outbreak of the coronavirus in China has put global markets on edge. On Monday, January 27th the Dow dropped over 450 points due to concerns about the spread of the virus after media reporting all weekend. Typically, events like this one are given an abundance of attention in the financial media because it attracts viewers like nothing else. Unfortunately, the result is often fear and impulse selling on the part of investors.
On Tuesday, January 28th the Dow regained 185 of those points even though news of the spreading virus worsened. Expect more volatility ahead.
The immediate concern of investors is what impact the outbreak will have on China’s economy and secondarily, what will be the effect on global markets. China is the second largest economy in the world and analysts are concerned about both consumption and production. If an outbreak of this nature happened in a smaller country the reaction would probably not be as strong.
So far the stocks of airline, hotel, casino and energy companies have declined the most due to concerns about reduced travel to contain the virus. No one can predict how long this will last or how far it will spread.
Some will remember the SARS outbreak in 2003. As of this writing, the current virus is neither as widespread nor as deadly as SARS. Of course, that situation could change, and it is important to keep a sense of perspective. The medical community is stressing that the U. S. will most likely experience more deaths from the flu this year than from the coronavirus.
Looking back at history is helpful, and during the SARS outbreak the market decline was temporary. This is usually how global events affect the market. There can be an initial knee-jerk reaction followed by a market recovery as the event unfolds. Often event-driven declines are short-lived and the market recovers. Ultimately, it is economic fundamentals that make long term changes in the market. The economy is strong and global markets have rallied back to their January 2018 highs in the last few months. We like the breadth to this rally across asset classes and around the world.
Given the all-time highs, a pullback is to be expected, and it usually takes a catalyst of some sort to start the pullback. In this case, that catalyst appears to be the coronavirus.
Uncertainty of any kind brings volatility into the market. We should expect more volatility until this event is brought under control.
China has taken measures to contain it as well as our own country, and citizens should take common sense measures to protect themselves while remaining calm. We should not react to headlines. Headlines are meant to disturb and sell print and airtime, and seldom are reason to make changes to our investment strategy.