Coronavirus: When Your Portfolio Catches the Flu

by Lear Capital EditorialFebruary 03, 2020

The market swooned this week on coronavirus concerns. The DOW dropped 431 points Monday, then regained a little over the week. Many US stocks are still suffering, notably travel and tourism related companies. Why the wild swings? Is it all overblown? Let’s unpack.

First of all, why does the market react so strongly to news of epidemics?

One reason is the market’s biggest nemesis, uncertainty. With news of the outbreak came the usual undercurrent of rumors and leaks. Are we indeed all going to die? Is it basically just a really contagious flu? It is very difficult to ascertain what is really going on in China if you’re not there. Leaked videos from supposed healthcare workers, however, paint an alarming picture. One “nurse” claimed over 90,000 are sick, FAR more than the officially reported 4,500. Another leaked healthcare worker video tells a similar story. Many other related videos have been deleted mysteriously, making many suspect censorship. China’s response in building an entire hospital in 5 days and quarantining entire cities makes more sense if the leaked videos are closer to the truth, but who knows? And markets hate that. The Chinese government is notoriously untrustworthy about bad news, so who do you trust?

Another reason for the market swings is that markets hate pandemics in general.

Even if the cost in human lives turns out to be overblown, the fear is what grinds economic activity to a screeching halt. Quarantines and travel bans mean that millions of dollars of economic activity is not happening. In Wuhan and Hubei province, and across China some 60 million people are quarantined, shut in their homes, not going to school, not working or shopping. They are instead canceling travel plans and just waiting out the danger. And of course, this hits right when a trade deal with China was signed. Wuhan is a major industrial center, whose factories produce electronics, cars and steel. This is already severely weakening China’s economy, trickling up and down the supply chain and over to us as a critical trading partner.

The biggest thing to fear really is fear itself.

Consider the SARS outbreak in 2003. 8,000 infected, less than 800 deaths but a cost of $50 billion to the global economy. Ebola crippled African tourism. South Korea quarantined 16,000 people in the MERS outbreak that killed 38 people in 2015 but tourism and shopping behaviors sunk the economy so low that the Korean central bank felt the need to plunge interest rates to a record low to recover.

Consider that as of this week, China has halted travel in and out of Beijing and Wuhan. They have closed 70,000 movie theaters. US companies like Disneyland Shanghai, all McDonald’s in Wuhan and surrounding areas have closed and their stocks have taken a hit. Airlines are seeing a dramatic drop in ticket sales to China and many Chinese New Year festivities have been cancelled. Can you imagine shutting down the American economy right before Black Friday and the Christmas shopping season?

Chris Martenson CEO of Peak Prosperity puts a global pandemic at #3 on his top fears list for these reasons. He knows both economics and infectious disease having studied pathology and toxicology at Duke University, and he is extremely concerned about the coronavirus situation. He has been posting daily updates and he says NOW is the time to prepare. Watch his January 28th update here.

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