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!
This chart shows that global stock markets have rebounded similarly to the US.
The short-term reaction should be determined by the numbers infected and those who die. With SARS 8,100 were infected and 774 died. Now with the Coronavirus, the numbers are 14,000 infected and 300 dead, so the markets are bound to be very nervous until some good news shows up.
Writing for dowjones.com, Al Root helped answer a question I've been getting from readers, listeners, viewers and my financial planning clients, about the history of when the market turns from negative to positive following a virus outbreak.
Root looked at a note written by J.P. Morgan's Asia equity and quantitative strategist Mixo Das, who said: "Past experience of market performance around such events suggests that markets tend to bottom with the peak in new cases and news flow."
Effectively, when the doctors are on top of the Coronavirus, you can expect a bounce back, if history can be relied on.
However, this market is at all-time highs and you must remember with SARS the stock market in the US had been beaten up by the Dot.com bust of 2000, and there was a lot more upside for companies that had beaten up in the stock market crash a couple of years before.
This could be a tough week for us because resources and tourism-related businesses are bound to be marked down, until the better medical news surfaces.
Looking at our top exports of goods and services, the Department of Foreign Affairs and Trade says coal makes up 15.3% of our total export income but education-related travel and personal travel adds up to 13.1%, placing it third behind iron ore at 14.4%!
All three exports are already feeling the heat of the market fallout from the Coronavirus.
The virus is stopping Chinese travellers. And in 2018, excluding children, 1.3 million came to Australia, which means they are 15% of our tourism customer base and they spent $11.5 billion!
On top of the bushfire slug to the economy, the local economy and stock market needs this like it needs a dose of the Coronavirus! At year's end, one bright spot looked like the rebound of Chinese economic growth, which came in at 6.1%, which was a tick better than expected.
That said, this virus looks like a good chance to be a buying opportunity. But "when" you position yourself is going to be a lot harder to work out. Watch this space.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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