The current headlines are filled with hour by hour updates on coronavirus: how far it has spread, every new case reported in the United States, and the massive stock market sell-off last week. There are lots of resources out there for what this new virus is and how you can prevent it, as well as how to prepare and protect your family from it. But many of my followers wanted to better understand about coronavirus and the economy and why this threat of global pandemic has caused such a market sell-off. So this week’s post is in response to all those questions, including when we think it will all recover and what you should do in the interim.
What is the coronavirus?
Unless you have been living under a rock, you’ve probably already been inundated with news reports about the now widespread, global outbreak of the coronavirus, an upper respiratory virus, with symptoms including fever, cough, and shortness of breath, which can also lead to complications including pneumonia, severe acute respiratory syndrome, kidney failure, and death.
What you may not know is that coronaviruses are actually a family of viruses known to cause everything from the common cold to more severe viruses that have caused other global health emergencies, including SARS (2003) and MERS (2012). The current outbreak is being referred to as the novel coronavirus, or COVID-19, as it is a new strain never previously detected before in humans.
What is the risk here in the US?
While the new coronavirus outbreak was originally detected in Wuhan, the capital of Hubei province in China, in our global economy, with worldwide travel, the virus quickly spread beyond the borders of the province and China.
Coronavirus, or COVID-19, is believed to be about as contagious as the flu, with each sick person estimated to infect 2.5 other people, but with a higher estimated mortality rate of 1-3%, and much higher for the elderly, those with compromised immune systems and those with inadequate access to care.
The US acted relatively quickly as news of the illness in China came to light, and announced a travel ban on Friday, January 31, temporarily barring all foreign travelers who had been to China in the last 14 days, while quarantining returning Americans.
However, over the course of February, the virus has been detected in the US, as well as over 40 other countries. At the time of this publication, there were 72 reported cases in the United States, 44 of which are tied to the passengers rescued from the quarantined Diamond Princess cruise ship.
You can follow the latest statistics on the outbreak, by country, including detected cases, deaths, and recoveries, on this dashboard from Johns Hopkins.
What should you do to prepare your family?
To prevent the spread of the virus, communities around the world have mandated city-wide quarantines, shutting down schools, factories and businesses. The CDC has indicated the virus is likely to spread throughout the US, and widespread quarantines are a possibility. Here are 5 things parents should do to prepare for coronavirus, as well as resources for what to do if you’re pregnant and get coronavirus.
Most of the recommendations are the same as you would follow to care for your family during flu season, with the most important being to WASH YOUR HANDS regularly.
Also, be sure to talk to your children about what is going on, so they hear from you firsthand about the coronavirus and not from overhyped news coverage or via misinformation from their friends at school.
For a thorough list of what parents should know about coronavirus, check out this great resource from my friend Stacey at The Soccer Mom Blog.
Coronavirus and the Economy: Your Questions Answered
Exactly what the virus is, how it started and how to treat it are all outside my expertise. I’m no medical professional. BUT the potential impact of the coronavirus on the economy, the stock market, and on individual stocks is exactly what I used to do.
As an investment analyst, I was regularly tasked with framing the potential impact of various threats, stresses and business risks on a company’s financials before making an investment. At the end of the day, we can only make an educated guess informed by the facts – but it’s better than over-reacting based on hysteria. I’ve walked through how I do that below, as I answer your questions about coronavirus and the economy.
Why has coronavirus caused a market sell-off?
It is impossible to exactly pinpoint the impact of a global health emergency. No one knows exactly how widespread it will be, how many countries or people will be affected, or how long it will take to contain it. And there’s nothing the stock market hates more than that kind of uncertainty.
But the reason the market declines in reaction to global health emergencies is that these illnesses do create a real economic and business impact. The following is a super simplified example of what could happen to a business if it faced shutdown due to quarantine. For simplicity’s sake, I’ve assumed the business earns the same amount of revenue every day of the year and assumed a level of fixed expenses and a variable expense percentage.
When you lose revenue, you also no longer have the variable costs associated with that revenue. You do however still have fixed costs you have to pay for like rent, employee salaries, administrative costs. With the basic assumptions above, you can get a sense of the potential impact of a week or month-long shutdown of a business.
It can be even worse if the shutdown occurs during a profitable season (like if retailers had to shut down during Christmas or as they did in China, during the national Chinese New Year celebrations). And as this is an oversimplification, it doesn’t include likely additional costs due to expiring inventory, shutdown and start-up costs, and potential costs associated with cleaning, disinfecting and protecting employees from illness.
Today’s economy is much more global in nature than ever before. Factory shutdowns in China, now impact supply chains globally, creating shortages and/or cost increases in goods from technology products to generic drugs. It’s important to understand that even if coronavirus doesn’t cause business shutdowns or mass quarantines in the US, it can still have an economic and business impact.
Is this a good or bad time to…
- Buy a house?
- Start investing?
- Buy stocks?
- Buy gold?
I got lots of questions like this. Whenever you make financial decisions for your family, you have to determine if you are making a long-term decision or a short-term one.
You need savings to ride out short-term emergencies and economic disruptions – like job loss, temporary loss of job hours, a potential hospital stay from a medical emergency.
But the current market volatility has created a great buying opportunity for those investing for the long-term. Stocks are on sale, at prices lower than they’ve been in 4 months. Mortgage rates are at or near all-time historic lows, making locking in a 15 or 30-year mortgage right now a no-brainer.
As for gold, many view holding gold similar to trading stocks for bonds during periods of market uncertainty. It is knowns as the flight to safety. When there are big global risks, investors globally often buy US stocks over other economies, US bonds over stocks, and gold. They are considered “safe havens.” This is why you may see the US market fall less than the global stock market, why bond yields are at all-time lows, and why gold and gold index prices increase.
So, my recommendation remains the same as always, with maybe a heavier emphasis on making sure your savings and emergency fund are in good shape. Don’t wipe out your savings on a down payment for a home, when you might lose your job or have your hours cut in the next 3 months. Don’t pour everything you’ve got into the stock market if you need those funds in the next 3-12 months. But do continue to invest as you normally have and would with your 401k, investing through the cycle, and benefiting from buying at lower prices during the sell-off.
Are there any stocks that are better to buy now than others?
Yes. There are certain industries taking a bigger hit than others right now because they are most directly impacted. The travel industry is getting hammered – airlines, hotels, cruise lines. Travel restrictions are directly impacting flights; no one wants to go on a cruise with a risk of ending up quarantined on a ship for weeks; and tourism as a whole will definitely be down this year globally. You are also seeing tech stocks take a bigger hit, as their supply chains are most likely among the most disrupted, as are their sales in China.
As you can see in the chart below, over the last month, the market is down 9%, while United Airlines is down 18% and Royal Caribbean is down 34%. Apple, which already warned its earnings would be impacted, is down 16%.
Stocks that are outperforming the broader market? Healthcare stocks and any biotech or pharma companies working on vaccines for the virus. As are consumer goods companies, like Clorox, as families stock up on cleaning supplies. Clorox is up 3% over the last month.
You’ll also want to make sure that any stock you choose to scoop up during this downturn has a strong balance sheet. Cash on hand to weather any periods of business closure or impairment, and low debt levels, which can limit their flexibility if cash is tight and revenue stalls.
In general, however, I don’t recommend the average retail investor invest in individual stocks without being fully informed about the company and your ability to actively monitor your investment. You are typically not going to be as well informed as professionals, and you are better off buying and holding passive index funds for the long-term.
Related Post: 10 Things to Know About a Stock (Before You Buy One)
How long until the market recovers?
Historically, stock market declines have occurred before major health organizations declared the official state of emergency, and even already begin to recover before the official announcement. As shown in these reports here and here, many might say the best time to buy is as soon as WHO declares an emergency. The WHO declared coronavirus as a global health emergency on January 30, 2020.
Stock Market Through Past Pandemics
Many are saying the market reaction is more severe today vs. prior global health emergency impacts given the long-run bull market we have experienced over the last decade, which has created sky-high stock prices with no margin for error. Effectively, we were due for a market correction anyway, and this is a massive trigger for it.
As always, past performance is no indication of future performance – but it’s the best data we’ve got to estimate from. This Fidelity report on past pandemics talks about the market impact of pandemics as far back as the Spanish Flu in 1918, which infected an estimated 20-40% of the total world population.
What will the economic recovery timeline look like?
It is difficult to know exactly how long it will take to contain coronavirus, but we can look to past global health emergencies and pandemics as a guide. A few things to note: many illnesses are known about for years, even decades or centuries, before flaring up and spreading. The dates used below are approximate, based on news sources, and World Health Organization and CDC timelines. In some instances, these illnesses still exist and occur around the world (HIV, MERS, Swine Flu).
The US Economy Through Past Pandemics
What is definitely evident is these global outbreaks are becoming far more frequent in our global economy and their impacts more widespread.
Have more questions about coronavirus and the economy? Or just general family finance ones? You can DM me on Instagram anytime or join our private group, Family Finance Moms, where moms just like you discuss all things family finance in a judgment-free setting.
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