It’s too late for containment.
“COVID-19” coronavirus is here and spreading in communities all over the United States. China, the second largest economy in the world, has shut down major manufacturing facilities for over a month. Supply chain disruption is already happening. Corporations are cancelling business travel. Schools are closing. The Tokyo Olympics might be delayed. The Federal Reserve just cut interest rates by half a percentage point in between policy meetings.
Real economic consequences from this virus are imminent. In the days and weeks to come the number of cases in the U.S. are expected to increase dramatically. Hopefully the death rate will drop as more cases are confirmed.
With all that doom and gloom now out the way, let’s imagine the worst case scenario.
This is an exercise we walk through as investors. The worst case scenario I can imagine is a global pandemic in which 1-2% of the world’s population dies from the COVID-19 virus. That is horrifying. It’s more than 150 million deaths. Every single person on the planet would know someone who died. The medical community expects that a vaccine will take over a year to develop.
And afterwards? Like all diseases before it, things will come to an end.
The remaining 7.4 billion people on earth will go on living life. We will need food, clothing, and shelter. Some may even decide to purchase the new iPhone. We will continue to go to work, drive our cars, and send our children to school. Sooner or later, cancelled vacations will be rescheduled. The goods and services provided by the stocks of companies we own will be in demand.
As I imagine this worst case scenario and the aftermath, I am reminded of New Orleans after Hurricane Katrina. 80% of the city was underwater from the failure of the levees. New Orleans was completely decimated, but it didn’t disappear. People, and life, are incredibly resilient.
The markets are exhibiting the visceral reaction we feel watching the spread of this unknown, deadly virus. Last week alone, the S&P 500 Index lost 11.5%. It was the fastest transition from all-times highs to correction territory on record.
Right now, you might be asking yourself, “Why does this happen?”
When we get scared, our brains produce the hormone cortisol, fueling our fight-or-flight instinct. This served us well for thousands of years when we were running from predators on the savannah. The prevalence of news and information (and misinformation) is fueling those fears at an instantaneous reaction speed.
What is an investor to do?
Panic selling leaves you with the decision of when to get back in. The very best time to get back in is also the most frightening time. Will you feel confident about buying stocks if things are even scarier than they are today? Doubtful.
Investing in stocks is hard.
Sometimes you get punched in the gut. Other times you get punched in the gut every day for months on end. Running away when the market rolls over rarely leads to a positive outcome. I have spoken to countless investors sitting on the sidelines, nervous about the market making all-time highs, not wanting to buy in before the next crash. Do you think they are excited to buy stocks now? Will they be ready is the market drops another 20%. Not likely.
The key to success as a long-term investor is finding a strategy you can stick with when times get tough. That means sticking with it through all the ‘crises du jour’.
Is it different this time?
Of course. They are all different.