The market is down on coronavirus fears: that is the headline that welcomed us this morning. While the coronavirus news out of China is still improving, there are now more cases in Italy, South Korea, and Iran. This has the market dropping.
The coronavirus is a human tragedy and our thoughts and prayers go out to anyone affected. Hopefully we learn the lesson and at the very least the practice of so-called wet markets is eliminated. Having said that, our role at Iron Capital is to navigate the crazy world of investing for our clients. We have to think about how the coronavirus impacts our client portfolios.
Outbreaks like this are similar in impact to natural disasters: they have an impact on economic activity in the immediate term, but that impact is short-lived. Once the crisis is over, people return to their normal lives. Of course, nothing feels short-lived while it is happening, but when we look back at 2020 three years from now (and it may not take even that long), the coronavirus is most likely a small footnote. I say most likely because I am projecting the future, and the future, of course, is always uncertain. When the weatherman says there is a 10 percent chance of rain and it ends up raining, that does not mean that he was wrong; once out of every ten times, the 10 percent chance hits. This is how averages work.
The odds of the coronavirus having a lasting meaningful impact on the markets is far less than 10 percent, but there is some minute chance that this time it is different. However, betting on such long odds is not the prudent thing to do. In fact, betting on these kinds of global news stories is never the prudent thing to do.
Some perspective is always helpful while going through such events. As of this morning, the market by almost any measure was still positive for the year. The S&P would have to drop another three and a half percent to simply go back to where the year started, and that was after being up more than nine percent last quarter. Being up a little more than nine percent in five months is not exactly bad. In fact, coronavirus or not, the market was well overdue for a correction. Markets never go up in a straight line.
Another way to look at the market is through moving averages; many market participants view the markets this way. Instead of paying attention to daily price movements, which can be very volatile, some look at the average price over the last fifty days or the last two hundred days. As of this morning, the current price was still higher than the fifty-day average, which is well above the two hundred-day average. That means the market’s momentum is still going up.
Will the coronavirus change the market’s overall momentum? Anything is possible, but it is not very likely. In our opinion, trying to guess the long-term impact of such global events is a fool’s errand. Prudent investors know what they own and why they own it. They invest from the bottom-up, meaning they judge each investment on its own merit as opposed to speculating over global events. This is what we do at Iron Capital, and it is what we will continue to do.
I have witnessed a lot of human tragedies during my career – hurricanes, earthquakes, tsunamis, outbreaks, and, of course, terrorist attacks. Each one was horrible and almost universally caused the market to drop; and every single time, those market drops created great buying opportunities.
I’m reminded of the wisdom of the old stockbrokers who were around when I was young in my career: the stock market is the only store in the world where people want less of the product every time that product goes on sale. That is when prudent investors want to buy.
Chuck Osborne, CFA