Are There Buying Opportunities Here?

FYI | Feb 05 2020

By Peter Switzer, Switzer Report

Are there buying opportunities here?

The last thing I ever want to be is an alarmist but the worst flu in modern times was the Spanish flu that killed 50 million people and infected 500 million! It occurred during World War I, so that partly explained the magnitude of the calamity that saw the Dow Jones Index drop 30%. However, modern medicine and global management of diseases is miles better than a century ago.

We have a lot to thank scientists and doctors for!

And while stock markets have a tendency to predictably react negatively to the uncertainty of something like a Coronavirus (as it affects tourism, airlines, infrastructure and resources businesses), I want to know if these tragic social and medical events lead to a buying opportunity for stock players down the track.

This isn't a pathetic attempt to make money out of tragedy but purely an investigation into the history of stock market reactions to a virus that threatens thousands of human beings and is bound to take stock prices and markets down. Last week saw bond yields fall as bond prices rose and the 3-month 10-year bond yield curve in the US went negative. This has been an indicator that a recession could be out there waiting to follow, especially if a major stock market collapse should happen.

It's all speculation but what does history teach us?

Marketwatch.com's Mark DeCambre has dug up some worthwhile analysis, which makes me think a market bounce after the worst of the Coronavirus is reached, is highly likely.

"Gauged by the market's performance during the onset of other infectious diseases, including SARS, or severe acute respiratory syndrome, Ebola and avian flu, Wall Street investors may have little to fear that this disease will sicken a U.S. stock market that finished 2019 with the best annual return in years and has kicked off 2020 at or near all-time highs," DeCambre concludes.

That said, there are some modern day matters that could make this virus more negative for stocks than it has been in the past.

"Risk velocity – the pace at which major risks and ‘black swan' events can affect asset prices – is elevated in today's markets compared to 10 years ago for three key reasons," said Seema Shah, chief strategist at Principal Global Investors.

He thinks social media driven news cycle, the interconnectedness of global supply chains and a pricey stock market, all could turn this virus into a black swan event and really hit stock prices more than usual.

These are all genuine concerns but the treatment/management processes today are better than 2003, when SARS was petrifying the world. Also, China is a more affluent country and these viruses are always more rampant where the population is less well-off and demanding. Beijing and President Xi can't afford to screw this up, even if he is President-for-life in a ‘semi-Communist' country.

After the SARS outbreak, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS. And about 12 months after that point, the broad-market benchmark was up 20.76%. When you look at market reactions over time, you can't help see the trend for diseases/viruses and market reactions.

With Ebola in 2014, the market rose 5.34% in the six months after and 10.44%. In 2006, with Avian flu in 2006, the gains were 11.6% and 18.36%. In fact, if you look at the 11 big medical threats to the world since 1981, the average market rebound has been 13%, with the biggest being the 35.9% bounce after the Swine Flu in 2009!


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