As of Friday January 31st, the stock market officially erased the gains for the year as fears of the Corona Virus increased and the United States ceased flights to and from China to curb the spread of the disease. While market reaction has still been somewhat subdued, the spread of the disease beyond China’s borders increases risks and investors are reacting accordingly. We are not virologists so cannot assess the overall health risks, but we can look back into history to see the outcome of similar events.
During 2003 Severe Acute Respitory Syndrome (“SARS”) broke out in China and quickly spread to the rest of the world. Markets reacted to the risk of the new outbreak, and sold off, but quickly recovered as the virus was contained. Stock markets finished 2003 strong as the fear receded. No one knows whether this latest outbreak will follow a similar trajectory, but history does have a lesson to teach us, and we believe that this latest outbreak will follow a similar pattern.
Of course, the difference between a panic attack and a bear market will rest in whether there is real economic impact to the virus. If the Corona Virus continues to spread it could change from merely fear, to true economic impact, and we will be watching the data closely for evidence of change, especially in China where the risk is greatest.
I am reminded of why we carefully analyze and assess the appropriate risk level for our clients. Despite positive economic news, there is always the risk of an unexpected event, whether political unrest, terrorist attack, outbreak of a virus, or some new danger. For those, who are appropriately diversified, there is little need to make knee jerk portfolio changes, since defensive positions are built in to curb downside and keep our clients plans on track.