Influenza, CV19 and Your Investments – Perception & Reality
29 Million Flu cases reported so far this year, and over 16,000 deaths…
reported in the US alone from our normal seasonal influenza. Meanwhile, the total number of CV19 cases worldwide is 83,000 with 2800 deaths. (Johns Hopkins Medical Center)
Facts about CV19: (month end Feb. 2020)
- The number of annual influenza cases in just the US alone this year, is far, far greater than all the CV19 cases in the entire world. (CDC and Johns Hopkins Medical Center)
- Only 60 reported cases of CV19 in the US (44 of those are from the Diamond Princess cruise ship.) (JHMC)
- The mortality rate for CV19 is not that high; even on the low side at about 2%. Additionally, almost zero mortality for children under 10, and most of the deaths were patients that had other complications and were older. Younger children do not seem likely to get CV19 for some reason. (Journal of American Medicine)
- The puzzling part of CV19 is not clear yet how it spreads, and there is not currently a vaccine. (Although Israeli scientists claim they are close to a vaccine.)
- The severity of the symptoms, for most people, does not seem that bad. It has been described as a “really bad cold.”
Perception is Greater than Reality
The stock market had an awful set of consecutive down days through the end of February as a result of the CV19 scare. The US stock market values retreated back to about where it was in September of last year, a drop of about -13%. The level of the drop was fairly normal from a historical perspective as the US stock market tends to fluctuate ten percent or more on a yearly basis. However, the speed of the drop surprised many and the concerns about CV19 accompanied by lower stock prices left many investors anxious and concerned. What should we think about this Corona Virus fueled downturn?
Supply Chain Disruption
“China is an important cog in the supply and demand chains of the world.”
Leland Miller CEO, China Beige Book
China is a major supplier of all sorts of goods, and the world’s largest consumer of commodities. Reports out of China are that many stores are closed, factories shut down and activity has crawled to a halt. The Chinese are reacting to the virus threat by taking drastic measures, resulting in economic consequences. The fear is that the ripple effect of the giant Chinese economy slowing production will adversely impact other companies and nations around the world. I have recently spoken twice with an executive in Shanghai and her personal observations confirm the media reports of a cessation of activity in the Sino region. Another potential casualty are the 2020 Tokyo Olympics which are already discussing cancelling all competitions.
It is the fear and uncertainty of disruption of global supply chains that is sending the stock market down and worrying investors. You have to admire the Chinese for their vigorous actions in response to CV19, but their measures are causing other problems, and many US companies are already projecting reduced sales and production because of the anticipated disruption of the supply chain and their ability to procure goods from China.
Adding to the very real concerns about the supply chain is the constant news and online hysteria about CV19. An epidemiologist at Johns Hopkins called the media frenzy an “InfoDemic” and encourages people to look to the WHO and CDC as sources of reliable and accurate information.
It reminds me of our local news station when there is a snow forecast. The airwaves are constantly inundated with news anchors bundled up in parkas and grave expressions warning of future snowfall. Often the end result is just a dusting of a few inches and a minor inconvenience, but the news people dramatize the possible snowfall as much as they possibly can. Perhaps the news cycle is guilty of the same over dramatization when it comes to CV19? The challenge for investors is not to get rattled by the barrage of reports, but almost certainly the media has contributed greatly to the drop in stock prices.
SARS & other Diseases
How has the stock markets responded in the past to other similar disease scares? Most of us remember SARS, but in our lifetimes, we have also suffered major outbreaks of MERS, Swine Flu, Avian Flu, Ebola, Measles, Zika, HIV/AIDS and more. I remember catching the Russian Flu during my undergrad days at the University of Washington and toughing it out by myself for a week in my dorm room with a jug of water under my bed, soaked with sweat from the fever. During the SARS outbreak in 2002-2003, the stock market initially dropped about -14%, but recovered relatively quickly in mid-2003 after the flu was contained.
Other diseases have similarly caused short term fear and panic, but as in the case of SARS, the economic impacts were fairly short. Notice in the chart below how global markets responded in 1, 3, 6 and 12 months.
Will we experience the same thing this time? No one know for sure, but if history is a guide, then a recovery is a reasonable expectation.
The US Economy is Strong
Remember that the US economy has been exceptionally strong for the last eight quarters, and until the CV19 scare a few days ago, the outlook has been optimistic.
Warren Buffett told investors on CNBC not to sell stocks, which he referred to as businesses, based on the headlines.
“The real question is: ‘Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours? You’ll notice many of the businesses we partially own— those are businesses and you don’t buy or sell your business based on today’s headlines. If it gives you a chance to buy something you like and you can buy it even cheaper then it’s your good luck,”
We have been doing risk planning for our clients over the last year. Our Robust Income Plan exercise is meant to model how retirement income might be impacted when the markets drop. We have had many discussions and reviews about this subject, so hopefully everyone feels that they are in a good position for cash and liquidity to wait this downturn out until it blows over.
The benefit of a prudent diversification plan is very apparent during this downturn, and may reduce risk for investors. Our real estate, gold, and bond positions have helped to offset the losses from the stock side of our portfolios. An investor with a well-diversified portfolio has not suffered nearly as much as someone who is only in stocks.
CV19 Stock Market Scenarios
What can we expect from here? Possible scenarios include:
- Slow but Full Recovery: Most likely scenario is a repeat of past history. The markets might struggle for several months. Scientists and countries work together to stop the disease. Stocks eventually fully recover, and all is back to normal.
- V-Shaped Recovery: Investors realize that they have wildly over-reacted to the frenzy. We have a V-shaped, rapid recovery of stock prices. This may be just wishful thinking on my part, but remains a possibility especially since our underlying economy has been so strong over the last 2 years.
- Global Slowdown: CV19 continues to spread and causes global economic slowdown. Markets and growth continue to droop, and then takes time to get back to normalcy.
It is unclear right now which scenario (if any of them) occur, but we will be watching closely, and of course be available to discuss and strategize with all of our clients
Action Items: What Should We Do?
“Never let a good crisis go to waste!”
So what should we do, and how might we take advantage of the market drop? Here are some thoughts and strategies to consider:
Rebalance: It may be a good time to review your portfolio and check if a rebalance is in order. While the stock market has dropped, most bonds investments have gone up. If your portfolio allocations have veered from goal, it might make sense to rebalance.
New Money to Invest: If you have new/uninvested cash, perhaps you might consider adding to your portfolio while the markets are down, and prices are more attractive. Be sure to review your spending and liquidity needs beforehand. The lower prices are, the higher the potential future returns for new money. As Warren Buffet stated, this could be “…your good luck.”
Roth Conversion: If you have been contemplating a Roth conversion in 2020, this might be an opportune time to implement a conversion. The lower prices are, the more shares you might be able to convert for a given dollar amount. If/when the market recovers, the price appreciation rebound inside the Roth IRA might now be tax-free. Many savvy investors have used Roth conversions in past downturns for their great tax benefit. (Of course, be careful to check with your tax professional about other tax impacts that might be caused by a Roth conversion.)
Tax-Loss Harvesting: If your non-IRA portfolio has investments with a negative cost basis, now might be a good time to consider if you want to exercise a tax-loss harvesting strategy. Realizing a tax-loss might allow you to save on your taxes, and there are methods to harvest losses and still stay invested in the market. Tax-loss harvesting is an example of turning a lemon into lemonade – creating some good out of a bad situation.
Income & Liquidity: If you have not reviewed your near-term income needs and cash needs, do so now. If you need cash, it might make sense to raise cash in the portfolio now, in case the markets slump even further. Remember the markets are still at wonderful levels as I write this, even though we have dropped from the all-time highs of late February.
Interest Rates & Loans: The rate on government bonds have hit lifetime lows as of the last week of February. Intermediate bond rates are lower than we have ever seen them; expect loan rates to follow. This might be a great time to review outstanding loans, HELOC, HECM, and mortgages to see if a refinance might save you money. Housing prices might also have a strong tailwind with the latest rate drop. Here on the eastside of Seattle, with major tech firms and many others hiring puts additional upwards pressure on homes. Lower rates might provide a good window to sell your home or purchase a new one.
Common Sense: A practical response to the CV19 hysteria, and the possibility of a widespread supply chain disruption is to stock up on personal necessities, like food and other staples. If you lived through the Seattle windstorm of 2006, you might feel the same way that I do. It was startling back then to see the Issaquah QFC shelves stripped bare of food, and how long it took for power and other basic essentials to be restored back to normal. Some basic self-reliance and preparedness is just good common sense. The worst outcome is that you have some extra food in your pantry for future consumption.
My personal opinion is that I am perplexed by the level of media and online frenzy. It is irrational and it just does not equate. The normal annual influenza kills as many as sixty thousand people annually in the US, and tens of millions of us catch the flu every year – but there is almost no mention, concern, panic or media coverage about the flu here in the United States. Not belittling the suffering of the Chinese, however simple math says that our flu in the US is over ten times worse than CV19. Why? Perhaps there is more to the story, but as of today, something just does not add up. As for me, I am more worried about catching the normal flu for now.
By the way – we are very impressed with our clients. We got several calls and emails the day that the US market dropped over 1000 points. Every single client asked us about adding more money to their portfolios. I am thankful that we get to work with such patient, thoughtful and careful investors. Those are great qualities to have for stock market investors.
We look forward to discussing these issues at our next review, and of course as always please feel free to call us if you would like to talk before your next scheduled meeting.
My hope is for joy, prosperity and good health for you and your family.
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