On February 1st, in the early days of the Corona virus (now the more specific Covid-19) outbreak, we noted that historical outbreaks had resulted in fear-based market sell-offs that ultimately became good buying opportunities. During the 2003 SARs outbreak for example, Global markets rapidly fell 12%, but then quickly recovered once the virus was controlled. Of course, every virus is different, and it is the fear of the unknown that appears to have the markets so unsettled. The Corona virus selloff is now more significant than SARs as investors grapple with the potential impact to the economy.
The news of Covid-19 spreading around the world has driven fear into the market. Even though deaths from Covid-19 are still quite low, far lower in fact than the annual deaths from the flu or many other known viruses, there are still too many unknowns, and the market hates uncertainty. Other viruses have a known quality and people and markets have become accustomed to their nature. How many people will be infected by Covid-19? How far will it spread? What will the eventual death toll be? Uncertainty breeds fear.
Of course, the steps taken to combat the virus are also beginning to impact the real economy. China is in the midst of a severe labor shortage that is impacting global supply chains. Travel is being limited throughout China, and many workers are not able to return to work. Factory closures, or slowdowns from labor shortages are impacting global supply chains, including US companies. Apple has already announced supply shortages, and companies like GM are resorting to flying components to the needed factories to keep them running.
Not surprisingly, the industries that have been impacted the most are the oil and travel industries, while real estate and utilities have held up relatively well. Bonds have continued to rally as investors seek safety. We are reminded on the importance of diversification, and our portfolios are behaving the way they should, with bonds at least partially offsetting the declines in stocks and providing stability in the midst of the uncertainty.
No one knows what the future holds, but we continue to believe that the most likely scenario is that Covid-19 will follow the path of viruses before it. As the world learns more of Covid-19, not only will scientists learn how to combat the disease, investors will be able to assess and appropriate consider the risk of the virus, settling markets. In the meantime, we continue to hold to our diversified, long-term strategy that plans for declines just like this.