5 Market Lessons from the CoronavirusSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on February 10th, 2020
By Doug Kuring, CFP®, February 10, 2020
On December 31, 2019 the first cases of what is now known as the Coronavirus were detected in Wuhan, China - a provincial city with a population of about 11 million people. News about the threat of the Coronavirus have since dominated global market headlines and swayed investor confidence in companies that operate in the Lodging, Tourism, Airlines, Energy, Consumer Retail and Biotech/Pharma industries. In a span of 31 days, this respiratory illness went from a flu-like cold to a global health pandemic and U.S Public Health Emergency.
The objective of this article is not to recite the news of the past month nor predict where this global health issue may end up. It is to try and provide a useful guide as to how this virus (and others like it) has impacted financial markets and what we can learn from it when planning ahead for our futures.
Lesson #1: The Coronavirus reminds us of the importance of the physical world over the digital world in the global economy.
Our lives become increasingly commingled with technology as each day passes. I can't tell you how many podcasts I've listened to with tech entrepreneurs using the saying "software is eating the world."
And they're right - health monitoring watches, custom gene therapy, and self-driving cars are the way of the future.
But the physical world still matters most when it comes to making the economy go 'round. Technology is a tool. But the tools are useless without the presence of healthy customers and employees who aren't afraid of getting sick.
Lesson #2: The Coronavirus reminds us of the laws of supply and demand.
A company's stock price is a function of whatever product or service it provides to it's end customers. Generally speaking, the formula follows this logic: Create a product or service. Sell that product or service to your customers. Make money. Sell more and more, make more money, watch your stock price go up.
The Companies that offer products and/or services that require people to physically come into contact with each other have seen their stock prices decline the most during the Coronavirus outbreak (see Airline chart below). The demand for what they provide to the economy has decreased because people don't want to risk getting sick by being in public.
Major airline stock prices since January 1, 2020:
Alternatively, Companies that offer potential solutions to halting the spread of, or curing, the virus have seen the biggest gains. The demand for what they provide to the economy has increased because, based on what the news is telling us, it sounds like we really need a vaccination and cure.
In its simplest form - If what you provide is in high demand, you will sell more, make more money and see your stock price go up. If what you provide is in low demand, you will sell less, make less money and watch your stock price fall.
Lesson #3: The Coronavirus reminds us that we have absolutely no control over a Company's stock price in the short run.
Owning individual company stock can be risky business in the short run. The list of things that can impact a Company and surprise it's investors nowadays is seemingly endless. Surprises are only welcomed when they're good - negative surprises cause stock prices to fall quickly.
Starbucks is a coffee company with a global footprint. I buy Starbucks coffee at minimum 1x a week. As of year end 2018, it had over 4,000 stores and 57,000 employees in China. As the spread of the virus accelerated, Starbucks was forced to monitor and change the hours of operation for it's stores to protect employees and customers. Then on January 28th, in conjunction with local government officials and Company management it closed more than 50% of its mainland locations in China until further notice.
Starbucks stock is down close to 8% since mid-January. Starbucks is still a great company - but in the short run, many factors can impact a Comapany's stock price that are outside our control.
Starbucks ($SBUX) after news of 2,000+ stores closing in China:
Lesson #4: The Coronavirus reminds us that the stock market is a "forward indicator" - a reflection of future expectations, not of what's already happened.
When you or I make an investment in a Company, we do it based on the belief that the future for that Company is brighter than it's present situation. Our future expectations of the Company cause us to invest.
The impact of less flights going to and from China won’t actually show up in Airline financials until March when they report earnings. But investors have already moved those stock prices lower based on their belief that airline ticket sales could be down substantially.
As a corollary, the price of Brent Crude Oil has plummeted -16.4% since January 1st. Why? Airline Companies buy gas to fuel their planes. And as a result of declining oil prices, Oil and Gas Companies won't make as much money. Investors have already been selling their positions in Companies like Chevron, Exxon Mobile, and Royal Dutch Shell.
Brent Crude oil prices:
Major oil and gas companies:
Lesson #5: We must remind ourselves that history shows global health outbreaks typically create short-lived overreaction.
Global health pandemics are not unique events in human history. While each strain of virus is itself unique, the mutation and development of new life threatening sickness is not - we've been battling that reality as humans since the dawn of time.
Since the discovery of AIDS/HIV in June of 1981, a global health event occurs on average 1 out of every 3.2 years. The list of viruses since then includes outbreaks like Swine Flu (2009), MERS (2013), Ebola (2014) and Zika (2016).
Each of these health scares dominated news headlines and impacted the global economy - many are still a health threat in certain regions of the world. Yet, historical data shows that the S&P500 has returned +9.3% growth within 6 months of an outbreak and +14.15% within 12 months of an outbreak.
Based on the rich history of similar outbreaks over the last 40 years, making changes to your long-term plan because of the Coronavirus at this juncture is not a rational decision.
If you would like portfolio advice, please do not hesitate to contact Reby Advisors.