Updated: Feb 24, 2020
Why the Coronavirus shouldn’t spell the end of the market bull run
While investors may initially panic amid a viral outbreak, data shows the US market typically pushes through those concerns and heads higher over coming months
As an investor, it’s often easy to get caught up in the emotion of an event, particularly when it has potential ramifications for the global economy.
With markets entering the new year at an all-time high, it’s also easy to begin looking for a reason to take risk off the table and sell out when there might not necessarily be any reason to do so.
With that, the onset and rapid acceleration of the novel Coronavirus has created some panic within financial market circles. Those concerns are focusing on the impact the virus could have in slowing Chinese economic growth, and in turn, the growth in other major economies around the world.
However, what history suggests is that the market often takes a more pragmatic view of the situation once the immediate fear and uncertainty of a viral outbreak has subsided. That is, the initial reaction to such events typically lasts for a limited time, before the market then begins to focus on other matters.
If we look at the SARS outbreak back in April 2003, in the 6 months following that period, the S&P 500 actually increased 14.6%. Over 12 months, the key index gained 20.8%.
This isn’t an isolated trend either. After Swine flu peaked in April 2009, markets posted gains of 18.7% and 36% across a 6 and 12 month horizon.
The stock market also increased after Ebola gripped investors in March 2014, edging higher by 5.3% and 10.4% across the aforementioned timeframes. Meanwhile, the outbreak of the Zika virus didn’t dampen the mood of investors in 2016, when the market surged 12% and 17.5% in the 6 and 12 months thereafter.
Even on a global scale, markets have generally risen after an epidemic, with the MSCI All Countries World Index averaging gains of 0.4% in the month after an epidemic, 3.1% in the 6 months thereafter, and 8.5% a year on.
Of course, many observers have compared the unknown severity of the 2019 Coronavirus with that of past viral outbreaks, flagging potentially higher risk. While that may be the case, much of the rhetoric floating around at the moment assumes a worst-case scenario. In today’s age, and with the progress made so far in mapping the virus, it is likely we will have a vaccine in the short-to-mid-term.
For investors, however, getting caught up in fear-mongering and selling out of the market might not prove to be the cure to avoid collateral financial damage. Take those above examples, and in fact, you would have encountered significant opportunity cost if you exited the market as those viral outbreaks intensified.
It also goes without saying that even in the midst of an event of this nature, or black swan events for that matter, certain stocks will always continue to outperform or otherwise defy the trend.
Yes, it is important to monitor and manage your portfolio with appropriate risk measures like derivatives, however, it isn’t wise to react hastily to an event that history tells us, could very well turn out to be a temporary blip on the radar.
Global Growth Portfolio
The portfolio gained 6% across January to start the year.
The headline result takes into account the portfolio performance fee, and also includes a sharp decline in the market on the last day of the month, otherwise indicating strong underlying performance.