Coronavirus and Your Investments

February 25, 2020

Dear Friends and Clients:

Undoubtedly you are all aware of this new virus outbreak in China. Although it is spreading to other countries it is mostly contained in China. As the news has been reporting, China has implemented extreme measures to contain and prevent the spread. They have quarantined towns affecting millions of people.

In 2003 the SARS virus in China can provide some historical data on the impact to equity and bond markets. According to the CDC there were 8,098 confirmed cases and 774 deaths representing a 10% mortality rate. Current Coronavirus information indicates there are 2,800 confirmed cases with 81 deaths reported by Chinese Officials (sourced through CNBC). This is a 3% mortality rate. Global equity markets did drop and bond yields dropped during the SARS scare. However, both equity and bond markets rebounded and by May 2003 recovered all losses due to this scare.

I can’t say the same is going to happen with this new virus or how long it will take to find affective treatments. So far it appears the mortality rate will be much lower than previous new virus outbreaks. We are hopeful this will be the case. Since we are in flu season, according to a report from CDC (Centers For Disease Control and Prevention) in 2017 between 291,00 and 646,000 people worldwide died from seasonal influenza respiratory illnesses each year. The wide variance range is due to using statistical modeling for countries that don’t keep adequate statistics. Unfortunately, many countries do not have the same level of vaccination programs as we do in the US and other more developed countries which increases the mortality rate. Put into perspective, normal flu causes more deaths than the SARS and so far, Coronavirus. Bloomberg reported today that the rate of infection for the Coronavirus in China appeared to be leveling off.

I don’t believe this virus is solely responsible for the 1,000-point drop February 24th or the weakness today. Equity markets have had a steady climb for many months with 2019 providing double digit returns. The tech sector and the FANG stocks were extremely overvalued in my opinion and the significant market pullback 4th quarter of 2018 was valuation driven. In 2019 these same stocks again became extremely expensive. Therefore, I believe we were due for correction. Investors are more willing to sell overpriced stocks during bad news which locks in their profits. Through yesterday’s close the S&P 500 has given back 5.5% (Yahoo Finance) which is a normal correction. No one can predict the long-term impact of this virus. In my opinion, the fundamentals are still good although they have weakened a bit. But currently I don’t see a recession in the near-term.

Prevention; CDC indicates there is currently no vaccine to prevent Coronavirus. They list these common sense actions to help prevent the spread of respiratory illnesses: Avoid close contact with people who are sick, Avoid touching your eyes, nose and mouth, stay home if you are sick, cover your coughs and sneeze into a tissue, clean and disinfect frequently touched objects or surfaces and wash your hands often and especially prior to eating.

Thanks for reading. If you have any questions please don’t hesitate to give us a call.

G. Pete FieldsCLU, ChFC
Capital Resource Group, Inc.