As you are probably aware, the market sold off on Friday and is selling off again today. As I write, the S&P 500 is down almost 1.5% for the day and is roughly 2.5% below the all-time high set last week. Worries about the coronavirus in China seem to be at the heart of the move.  Headline risk (the threat of the coronavirus) is ever-present, so let’s dig a bit deeper into what may be going on.

Yes, the market is down but does that mean investors are running to sell their holdings?  Maybe, but maybe not.  Ignoring the trading community (those people and institutions that trade heavily and often) every day there are investors who need to sell holdings … people who have to raise cash to pay for that car they bought over the weekend, or for the down payment on a new home, or to settle an estate, or for a monthly cash infusion into a checking account.  There are sellers every day. But when headlines like the coronavirus spring up, many investors who might otherwise be buying will sit on the hands. I’ll wait and learn a little more about what’s going on … I can buy tomorrow. Same number of sellers but fewer buyers means stock prices go down until those buyers are enticed off the sidelines. It’s important to recognize that a down day, even a big one, does not mean that everyone is selling.  It could mean there are just that many fewer buyers.

The other thing to recognize about where we are right now, is that the market is up A LOT over the past four months. From early October through last Thursday, the S&P 500 is up over 13% … that is A LOT. So having a bit of a pause or a pullback, for whatever reason, should be expected and frankly welcomed. Pauses to refresh are important for the market.

Now let’s turn to the specifics of this pullback. The news will say investors are worried about a pandemic that will hurt global growth and corporate earnings. That’s a possibility, but let’s think about the likelihood that what we’re seeing so far has the potential to reach such proportions.  As of today, roughly 3,000 cases and 81 deaths related to the coronavirus have been reported in China. Five or six cases have been reported in the U.S., brought here by people who traveled from the epicenter of the outbreak in China. A few other cases have shown up in other countries as well. Those numbers seem scary until you consider the flu season we experience in the U.S. every year. For the 2019-2020 flu season to date, the CDC reports 140,000 flu-related hospitalizations and 8,200 deaths. Millions more flu cases did not result in hospitalization or death. And this flu seasons is about average compared to the last 10 years.  Coronavirus news might sound scary, but the flu season we experience every year is many times worse.

Recent outbreaks of Ebola, sars and some other scary viruses, offer a perspective for considering this current event:

  • A pandemic is an ever-present risk (health and headline);
  • Pandemics mostly do NOT happen; and
  • It takes a very serious and unique virus to have a major economic impact.

Unless the coronavirus explodes to become much worse than a typical flu season, its ability to deliver a meaningful, negative impact on corporate earnings is unlikely.

We are monitoring a variety of market-stress indicators and other data to help understand the implications. At this point, however, it seems that while travelers may need to take precautions against the outbreak, the same does not hold true for investors. If something changes, I’ll be in touch.

If you have questions or would like to chat, please let me know.