The coronavirus outbreak and your portfolio

Your Investments: “I pictured myself as a virus or a cancer cell and tried to sense what it would be like.” - Jonas Salk

By AARON KATSMAN
Prime Minister Benjamin Netanyahu holds an emergency meeting on the coronavirus epidemic. (photo credit: CHAIM TZACH/GPO)
Prime Minister Benjamin Netanyahu holds an emergency meeting on the coronavirus epidemic.
(photo credit: CHAIM TZACH/GPO)
Turning back travelers from China. Stopping air travel to China. The world is in a mild panic about coronavirus. With more than 500 deaths and 25,000 individuals infected, the potential for a global epidemic exists.
Gary Schlossberg, Global Strategist at Wells Fargo writes, “Uncertainties are rising with the spread of the coronavirus disease. Adding to market jitters is the ever present threat of a pandemic fostered by globalization (e.g., the large increase in air travel in the past 20 years), a more susceptible, aging population, previously unknown pathogens and resistance to antibiotics.”
I have received many calls, mostly from newer clients, wanting to know if they should cash out their investment portfolios because the spread of the disease will cause a stock-market crash.
There are those who point to the SARS infection of 2002, and say that there was a lot of hysteria but not a huge amount of economic damage and stock market losses were short-lived. Countering that argument is Peter Goodman of The New York Times who rightly points out that we are talking about a very different China than that of 17 years ago.
He writes, “In 2002, when a lethal, pneumonialike virus known as SARS emerged in China, the country’s factories were mostly churning out low-cost goods like T-shirts and sneakers for customers around the world. Seventeen years later, another deadly virus is spreading rapidly through the world’s most populous country. But China has evolved into a principal element of the global economy, making the epidemic a substantially more potent threat to fortunes. International companies that rely on Chinese factories to make their products and depend on Chinese consumers for sales are already warning of costly problems.”
The impact could threaten global economic growth significantly. Goodman continues, “Apple, Starbucks and Ikea have temporarily closed stores in China. Shopping malls are deserted, threatening sales of Nike sneakers, Under Armour clothing and McDonald’s hamburgers. Factories making cars for General Motors and Toyota are delaying production as they wait for workers to return from the Lunar New Year holiday, which has been extended by the government to halt the spread of the virus. International airlines, including American, Delta, United, Lufthansa and British Airways, have canceled flights to China.”
Even here in Israel, the tourism industry could suffer a big hit. While Chinese tourism accounts for only 3%-4% of those visiting Israel, the real issue is if global tourism cools off as people are scared to take to the air. That could create a much bigger negative impact on the local economy.
SO WITH all the negativity and worst-case scenarios what should investors do? The reason I mentioned earlier that the calls I have received are from newer clients is because those who have been with me for a while know what I will say. Never panic. Those who panic inevitably lose. Will the market drop? Good chance. Because of coronavirus? I have no idea.
What I do know is that markets drop 10% on average almost once a year. In addition, the drops tend to be short-lived. John Prestbo at MarketWatch determined that the average correction (which worked out to 13.3%) lasted a mere 71.6 trading days, or about 14 calendar weeks.
Time the market?
I mentioned that I have started to receive calls from clients getting a bit nervous. One of them asked me what I thought and I said that since she has a 20-year horizon, trying to time the market is silly and that she should stay the course. We then went back over her long-term returns and found that because she stayed fully invested during the sub-prime crisis of 2008 when the stock market dropped more than 30%, she still more than doubled her money if you look at the account value pre-market crash. That was eye opening for her and convinced her to not panic.
For investors with long-term time horizon, if we have learned anything from stock market history, it is that markets don’t go down and stay down forever. They eventually go up and the crisis that caused the drop is forgotten. If the market does drop, it could present a great opportunity to pick up great companies for cheaper prices.
Time horizon
Remember that short-term volatility happens all the time, and markets can and will drop.
The most important aspect to determine how to react to market jitters is to figure out what your time horizon for the investment is. If you have a short- to mid-term time horizon, you have no business investing heavily in stocks. If you have a seven-year or longer outlook, then short-term swings shouldn’t cause worry and you should keep your eye on the long-term performance of the stock market.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il.