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Has the Market Overreacted to the Coronavirus?




At this point, I’m sure you are fully aware of the coronavirus (at least I would hope so) and you may also be aware of the direct impact that this virus has had on Stocks and the overall Financial Markets. In the past week or so, we’ve seen the coronavirus continually spread while also leaving a significantly negative impact directly on the Stock Market. Stocks across multiple sectors have been tanking, major indices like the DOW and S&P have consistently been red and some of you may be thinking, do I need to sell? Is it time to panic? Or maybe even you’re thinking, are there any opportunities arising as a result of falling prices? Well, there may not be a straight up answer to any of those questions, but in order to even think about all of that, we need to first lay some context.

In early December, 2019 we saw the initial breakout of the Novel Coronavirus (COVID - 19) in Wuhan, China. Since then we’ve seen about 83,000 confirmed cases across 50 different countries, resulting in around 2,800 deaths (3.5% death rate as of February 28th).

As the virus has continually spread, the financial markets have begun to take on more damage. The Shanghai Composite Index (SHCOMP) has sunk 7-9%, the DOW saw its worst week since the 2008 financial crisis and pretty much all domestic power stocks are down heavy (since Feb 17th, 2020: (MSFT -15%, APPL -16.5%, AMZN -14.57%).

Now, this all might seem a bit scary and for good reason, however, I think investors are forgetting that the US markets have been on an absolute tear over recent months. We’ve seen a collection of Fed interest rate cuts, immense buying pressure, we nearly saw a DOW 30,000 close and maybe, just maybe a correction wouldn't be that crazy to wrap our mind around. Continuing on, maybe we’ve seen this massive red week due to the fact that investors finally have a reason to sell and take profits, something that investors have seemingly been waiting for. Often with extensive bull markets and nonstop record highs, investors get a sense of euphoria and start to get complacent. But in the case of our current market, outside of the Tesla craze, I don’t feel as though I've seen much euphoria, rather, investors recently have been incredibly skeptical and conservative. Maybe this is due to the overvalued IPO attempts of late or even the lasting odor of the 08 crisis, either way, investors have finally gotten their reason to sell and we have seen no shortage of it. From here I suppose the main question we have to ask is, will this carry on? Well, the only way to answer that is to look at past viruses and how they have impacted financial markets. Two recent comparisons are the SARS epidemic of 2002-2003 as well as the Swine Flu (H1N1) pandemic of 2009-2010. These were two very different viruses, SARS was much less widespread (only 8,000 cases) but much more deadly (9.6% death rate) and the Swine Flu was vastly widespread (700M - 1.4 billion cases) but not very deadly at all (0.02% - 0.08%) death rate. The coronavirus is unique in a sense that it has components of both of the previously mentioned viruses, it is increasingly becoming more widespread while also having a death rate that might not be SARS/Ebola level bad, but is a bit more concerning than the Swine Flu.

The thing is, these viruses pop up quite frequently, some are worse than others, usually they create some level of market uncertainty, people start to panic and then all the sudden, 6 months later we kinda forget they even happened. In the case of coronavirus, I don’t think it is much different. Yes, the virus is scary and yes the markets have reacted negatively but we all know at the end of the day these things get resolved and the markets get back to being efficient over time.

The theme of this whole thing is, there is no one answer to what you should do regarding your investments. If you’re really scared, then maybe it's okay to trim off some of your holdings and realize your gains, or if you want to take advantage of low prices while everyone is panicking, then go for it.

At the end of the day, viruses happen, people panic, people buy, people sell, you just have to make the right decision for yourself and make a decision that you are ultimately comfortable with.


That's all I have for today, I'll see you guys next time

Alex