Coronaviruses are actually a group of viruses that cause diseases in mammals and birds. In humans, the virus causes respiratory infections, much like the common cold or flu. However, rarer forms of the coronavirus like SARS and MERS can be much more lethal. As of Feb 2020, there are no vaccines or antiviral drugs that are approved for prevention or treatment.
When I first started hearing about the Wuhan coronavirus, I immediately thought about buying stocks. I had worked in Asian equities during the 2003 SARS virus outbreak that started in Guangdong, China. SARS ultimately infected ~8,000 people and killed ~774 people across 26 countries.
Then one day, we stopped hearing about the SARS virus. Asian stock markets stopped going down and began to rebound. My thinking is that the same thing will probably happen again.
Before buying stocks across Asia and the U.S., I decided to do some research to give me some reasonable entry points as to when to buy. Whenever I decide to invest in equities, I like to do so in five tranches. The reality is, I’m always buying throughout the year because I’m always saving and investing at least 50% of my after-tax savings.
If you are an investor, let me share some information I learned about the coronavirus and past viral epidemics to help you make a more informed investment decision.
Market Performance During Past Pandemics
In general, I buy stocks when there are temporary exogenous variables that have no bearing on a company’s fundamentals. The key unknown about the Wuhan coronavirus is how far can it spread and how deadly can it be.
The greater the fear about the Wuhan coronavirus, the greater the impact it will have on economic output and company profits. When people are afraid, they stop traveling, buying goods and services, eating out, going to work and so forth.
The worst-case scenario is that the world turns into one giant Walking Dead or Resident Evil set where nobody dares leave their house, except to forage for food and water. I highly doubt this will happen.
Below is a chart that shows the various market performances during the SARS, Swine Flu, Ebola, and Zika pandemics.
The data says the average selloff is -4.7% over a 1- 3 month period followed by a 12.3% rebound one month after peak scare and a 23.1% rebound three months after peak scare.
As of now, the Wuhan coronavirus seems most similar to SARS. Therefore, we can expect the China and Hong Kong markets to initially sell off around 9% or more. Some Hong Kong ETFs include EWH, FLHK, ZHOK and some China ETFs include FXI, CNYA, MCHI.
Based on the chart below, however, the Wuhan coronavirus looks like it’s spreading much more aggressively. Is this because the Wuhan coronavirus is deadlier? Or is it because the world is much quicker to track the spread 18 years later due to technology and social media? Perhaps the answer is both.
I’m personally nibbling on some China and Hong Kong ETFs now, but have no expectations for being able to time the bottom.
Back in March – April 2003, the S&P 500 didn’t correct at all due to SARS. Instead, the S&P 500 kept marching higher until everything came crashing down starting in early 2008.
The difference between 2003 and 2020 is that in 2003, the U.S. was just recovering from the 2000 dotcom collapse. Valuations were cheap, excess froth was out of the market, and investors were hungry to get back in.
The S&P 500 today has gone through an incredible 10+-year bull-run. I feel investors are much more hesitant now, given valuations are not cheap. Therefore, the S&P 500 could easily correct by 10% or more.
If you are a buyer of the S&P 500 and want to buy more than you normally do, I would leg in with every 2% pullback. Getting back to 3,000 from 3,225 is just a 7% correction.
Based on my stock market bottom evaluation, the S&P 500 could easily drop down to 2,200 when everything is all said and done. Remember, the average bear market lasts around 17 months.
Below is the current and historical Shiller PE ratio which shows rich valuations.
Putting The Coronavirus Into Perspective
As an investor, you want stock markets to overcorrect during viral outbreaks so you can buy. Although it’s still early, below is a great chart that shows how the Wuhan coronavirus stacks up against other major viruses.
As you can tell from the chart, so far, the Wuhan coronavirus has a very low fatality rate of 2% compared to the other viruses.
As of March 31, 2020, the latest data shows the deadly virus has spread to more than 70 countries with more than 825,000 reported cases, more than 40,000 deaths globally, and 174,000 recovered. You can track coronavirus cases in the world and by country through WorldMeters.
So far, it looks like the fatality rate is staying consistently low at around 2%. If and when the fatality rate starts to aggressively jump is when I’d start worrying.
Meanwhile, there have been an estimated 19 million cases of flu, 180,000 hospitalizations and 10,000 deaths in the U.S. this 2020 influenza season so far according to the Centers for Disease Control and Prevention. In a bad year, influenza has killed up to 61,000 in the United States alone.
Therefore, the Wuhan coronavirus numbers thus far are small when compared to those of the latest influenza strain.
Another thing investors should consider is a country’s preparedness for a viral epidemic. Wealthier developed countries are considered much better equipped to deal with an epidemic than are poorer developing countries. See the map of the world below according to the Global Health Security Index.
Although the coronavirus has arrived in America, we should not be too worried that it will develop into a countrywide epidemic that sickens and kills many people.
After initially stumbling with the initial reporting of the virus, I’ve been impressed with the celerity in which China has acted to try and contain the outbreak. They’ve locked down millions of people and even built a new 1000-bed hospital in Wuhan in 10 days to help treat the sick. It seems like Chinese citizens so far are cooperating with government instructions.
Once the flu season is over, I’m betting that the coronavirus’ toll will dissipate by the second half. The shelter-in-place orders have significantly helped flatten the curve and lower the total fatality rate across the entire country according to the CDC. This is HUGE! See the chart below.
My main accounts for buying stocks include:
- Daughter’s 529 plan. Each adult can contribute up to $75,000 during the first year or $15,000 per year.
- SEP IRA
- Solo 401(k)
- Various taxable investment accounts
As for real estate, I’ve already used a lot of my stock market gains from 2019 to buy a new primary residence in San Francisco. I also already refinanced my mortgage before the Wuhan coronavirus outbreak.
I highly suggest you refinance your mortgage as well as the 10-year bond yield has dropped close to ALL-TIME lows. Take a look at Credible, a leading lending marketplace where pre-qualified lenders compete for your business and provide you real quotes in a matter of minutes.
Once I start getting a large amount of capital back from my 18 existing commercial real estate investments around the country, I plan to reinvest most of the proceeds. In the meantime, I’m researching cheap states with strong migration trends so that when my capital is returned, I’ll be ready to reinvest it.
I believe real estate will outperform the stock market in 2020 as it did in 2018. Investors want to invest in assets that are tangible, provide utility, produce income, and don’t just go *POOF* overnight like stocks. My favorite real estate crowdfunding platforms are Fundrise and CrowdStreet to diversify my real estate investments across the heartland of America. Just be careful about the hospitality projects given the shelter-in-place rules.
I’m an aggressive buyer of the S&P 500 below 2,400 to get my equity exposure up to 25% of my net worth from 20%.
The Best Ways To Avoid Getting Sick
Finally, let’s go over the best ways to avoid catching the common cold, the flu, or the coronavirus. The strategies include:
- Wash your hands often with soap and water. Anti-bacteria foam and gel help, but are not as effective as washing hands with soap and water for 20 seconds or longer.
- Avoid touching your eyes, nose, and mouth, which accelerates the spread of infections. We touch our faces about four times an hour on average. If you wear glasses and a mask, perhaps you can help prevent contamination.
- Avoid sick people, duh.
- Do not share glasses, eating utensils, water bottles, and other items that can transfer bodily fluid.
- Consider temporarily pulling your kids out of childcare or school during the flu season if you have the energy, money, and time.
- Change into a fresh set of clothes after being out all day.
- Give your house a deep clean and wipe down handrails and doorknobs if it’s been a while.
- Reconsider going to a hospital or emergency care unless absolutely necessary. If you go, wear a mask and wash your hands.
One last thought before I go scrub my bathroom floors. If we continue to get further viral outbreaks, the trend towards remote work will probably accelerate.
Who wants to risk getting sick taking crowded public transportation or be in an office for 10+ hours a day with potentially sick co-workers? A viral incubation period usually lasts 7-21 days, so it’s really hard to know. The desire for bigger houses will probably go up as well, given we’ll all want more space to prevent us from going crazy.
As investors, we may likely have to wait until summer 2020 before the Wuhan coronavirus hopefully runs its course. In the meantime, make sure your portfolios are appropriately positioned based on your goals and risk tolerance.
Fingers crossed scientists can come up with a vaccine. Stay healthy everyone!
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