By: Carter McClung
We are in the midst of unrivaled fear and uncertainty. We don’t know when the market is going to recover, what the future of the economy will be like, how healthcare will handle the increased capacity, and when there will be a cure for COVID-19. These times are not normal, and it’s okay to feel overwhelmed or anxious about what is going on because quite frankly, we are nervous too! One thing we can do during all this chaos is to take a deep breath and focus on what we can control. Carl Richard has a nice visual to describe these times.
With that being said, what we can focus on is our behavior and how we choose to react to these unpleasant events. What I would like to do, is touch on the origin of this virus, shed some perspective on previous health pandemics, then finally offer some perspective on how the market has historically responded to these acute selloffs.
COVID-19 got its origin from a food market in Wuhan, China, the virus has quickly spread from its origins into various areas around the world and started to raise uncertainty among consumers and investors. While we’re not medical experts, what we see from our research is that this virus is spreading quickly and practicing recommended measures from the CDC such as social distancing, staying home, and keeping clean should be followed to prevent the disease from spreading faster than it must. The chart below shows how COVID-19 compares to other viruses.
While these numbers seem large what we find after every pandemic is that once the dust settles, the mortality rates are adjusted to reflect accurate data. For example, WHO originally said the H1N1 Swine Flu’s mortality rate was 1.3% then 4 years later after receiving all the data then revised the mortality rate to .02% which reduced the mortality rate by 65 times. Will this happen with COVID-19, almost certainty. Why? Media pandemic math. Let me explain. What we’ve found from research out of Harvard estimates that 40% to 70% of the world will be infected with COVID-19 which includes total people inflected including those with no symptoms. What then happens is the media uses the hyperinflated 70% of the population and current mortality rate of 4.1% to say that six billion people will be infected, and 246 million people are going to die. If you believe this you’re going to hide under a bunker, buy food for months and live in complete fear. What we find after every pandemic that once the dust settles, these mortality rates are adjusted to reflect accurate data. Dr. Richard Schabas who served as Ontario’s Chief Medical Officer of Health for 10 years, and was a chief of staff at York Central Hospital during the SARS crisis in 2003 wrote in The Globe and Mail that he predicts COVID-19 will have “an overall burden comparable to that of influenza.” While COVID-19 is alarming and currently causing a deviation from normal business and daily activity, we remain optimistic. This is due to the fact that we live in the most technologically advanced civilization the world has ever seen and with all medical advancements we’ve made with the smartest Doctors, Scientists, and Medical staff all working together on one event, we’re confident we’ll find answers quickly.
Shifting gears into the economic effects of this virus, what we see is that businesses are taking the necessary precautions to limit the spread of the virus and they’re closing their doors for the time being. With business closing, this affects the whole spectrum of companies along the supply chain and has a rippling effect on the economy which is being currently priced into the market. Additionally, with the growing uncertainty of what this virus means for the future, we are seeing large selloffs from institutional investors and leveraged hedge funds covering their positions. The federal reserve has reacted by cutting the federal funds rate to 0 and is adding $1.5 trillion of liquidity to the banking system. President Trump has signed three phases of a stimulus package which consists of funding virus research, free COVID 19 testing, and implementing a $1,200 tax credit per adult and $500 for each child for some families.
From this event, in the near term, we can expect a steady flow of volatility regarding the coronavirus-related uncertainty. It’s easy to be worried during times like this, no one likes to see their investments fall. Yet, this episode of stock-market volatility has always been a part of the investment landscape.
This graph illustrates intra-year declines verse what the calendar year returned. What we notice is that volatility is a natural result of the risk-to-reward profile for investing in the stock market. American Researcher Jason Geopfert shared a great data-point, “We just saw 2 days with 90% of NYSE issues going down. When we saw a similar 2-day period of such widespread selling in the past, the S&P500 rallied every time over the next two months by a median of 7.6%” This statement is further validated through portfolio manager Ben Carlson from Ritholtz Wealth Management who pulled monthly S&P500 returns going back to the mid-1950s to show total returns leading up to, during and after each of the past nine recessions. Here’s what the analysis concluded.
What we see is that for every recession that we have had over the last 70 years, each subsequent 1 year afterward the market has rebounded on average by 15.3%. Averages 3 years after are 40.1% and 5 years after is 78.7%. While we don’t know for certain what this market downturn will yield, one thing we do know is that based on past historical data, we can take a breath and rest assured in the long-term potential of the markets.
During times of market uncertainty like we are experiencing, we want you to know that we are aware of what is going on in the market and around the world. We monitor your plan closely and we do our due diligence before these changes happen to make sure that we can weather the storm with whatever comes our way.
Not only are we aware of what is going on but the State of Delaware released an article stating, “The Division of Public Health is well-prepared to lead the response regarding coronavirus disease.” Additionally, it was also mentioned that Delaware is making pre-cautionary measures to follow CDC recommendations to enhance preparedness.
As one last note, going back to our original message from Carl Richards about focusing on what is within our control. I would like to share one more image of his that offers some perspective on the importance of staying disciplined for the long-haul.
In times like these, the value of long-term planning can show its merits. While it’s human nature to want to avoid losses, the reality is that we cannot time the markets and now is not the time to panic. We are confident in the longstanding potential of the markets and are holding our positions. We remain positive in what the future holds, we are all in this together!