Here we go again. The financial headlines are once again screaming financial market annihilation and impending collapse. “ASX slammed” shouts one, while another tells of a “Wall Street crumble” and, in relation to the Dow Jones, “the biggest point drop in history”.
Everywhere you look, the financial news is currently filled with stories of share markets crashing and of investors fleeing, presumably for the safety of cash. To a novice investor these shrill warnings can’t help but create anxiety, however long-standing Clover investors will know that we’ll hear these same siren songs from time to time, without the imminent financial meltdown eventuating.
The spread of the novel Coronavirus, from its initial detection in Wuhan province, China late last year, has resulted in what can only be described as a panic in major share markets in recent days, with the US S&P 500 index falling almost 15% from its peak in mid February, while the Australian S&P/ASX 300 index has retraced all of this year’s gains and is now down some 11% in that same period.
The reactions of global investors to this latest viral outbreak may, however, now be running ahead of its ultimate impact on human and economic welfare. Time, of course, will tell, but this coronavirus is not the first global health scare that the world has endured in the last forty years and it will most certainly not be the last. None of the others have permanently impaired financial markets and there is no reason to believe that this time will be any different.
What is This New Coronavirus?
Like SARS, and the more recent MERS last year (which mainly impacted the Middle-East), this new virus is from a family of viruses known as betacoronavirus. These are commonly found in many species of animals, including camels, cattle, cats and bats.
The highly respected Centre for Disease Control and Prevention (CDC) in the US is pointing to bats as the most likely animal reservoir from which this latest coronavirus, now known as COVID-19, transferred to humans.
The CDC also notes that, for those infected, the illness can vary greatly, from mild symptoms, such as cough, fever and shortness of breath, through to severe illness resulting in death. While the virus has shown itself to be highly transmissible, to date the mortality rate appears to be significantly lower than the SARS outbreak of 2003, where less than one in ten (some 774) infected patients globally died.
By way of context, up to 6 October 2019 some 812 Australians were confirmed to have died as a result of influenza last year, according to the Department of Health’s latest Australian Influenza Surveillance Report.
Financial Market Reaction
Financial markets were relatively unfazed while COVID-19 was thought to be contained within China through January and into early February, but reports in recent days of its rapid spread through countries such as Italy, Japan, Iran and South Korea has sparked a rush for the exits among some investors.
There is no doubt that the falls on global share markets during February, particularly in the last week, were severe. Figures just released by global index provider S&P Dow Jones Indices indicate that the S&P/ASX 200 fell 7.7% for the month, while the bellwether S&P 500 index in the US fell some 8.4% in the same time.
Markets were clearly caught off-guard by the rapid spread of COVID-19 beyond China, as market strategists and economists tried to forecast the impact of the virus’ spread on global economies, the movement of people and goods, and the flow-on effects on global trade.
The reality however is; we simply do not know how far the COVID-19 virus will spread across the globe, and what impact it will have both within and across nations. It really doesn’t matter how talented market forecasters think they are at crystal ball-gazing, the truth of the matter is few even considered the possibility of a global viral outbreak in 2020, let alone one like COVID-19.
Keeping Things in Perspective
If the ‘market experts’ didn’t see it coming and the health authorities can’t tell how the COVID-19 virus will play out, exactly what should we, as investors, do as share markets currently gyrate wildly?
Well, the first thing to do is to tune out the noise now emanating across the financial news and the web. News of market falls is optimised to grab your eyeballs and ears, then transfer some of your wealth to more patient investors who know that short-term blips are the price that must be paid on the road to long-term wealth.
Take that “biggest point drop in history” headline. Here’s a little perspective. It is true that while last Thursday night’s 1,191 point fall on the Dow was the largest one day index value decline, it was not even in the top 100 one day falls as a percentage.
Not exactly the stuff of total market capitulation, but that headline would never have grabbed enough eyeballs from a marketing perspective. This is the world we now live in. Don’t let your future wealth be a victim of someone else’s SEO strategy.
Here’s also what you didn’t hear on the news last week. While share markets might have been tumbling, bond markets rose strongly. The S&P/ASX Australian Government Bond Index 0+ rose 0.74% for February, to be up 10.1% for the year to date. If you’re a Clover investor you will, irrespective of how aggressive a portfolio you hold, have some exposure to Australian bonds for exactly this diversification benefit.
Many eggs in many baskets. It’s the bedrock philosophy by which we operate, because you’ll be thankful for its ability to cushion your portfolio in exactly these market conditions.
Not the First Viral Scare We’ve Lived Through
While COVID-19 may appear set to cause global devastation to populations and financial markets alike, it helps take a broader historical context on previous virus outbreaks that have threatened humanity.
Over the past forty or so years, the world has faced a number of biological threats, from HIV/AIDS in the early 1980s to SARS in 2003 and the re-emergence of Ebola and Measles more recently.
Each, left unchecked, could have resulted in protracted health and financial market impacts. Instead, as the chart below shows, over the last 40 years none have had any lasting impact on either our collective health or financial progress.
The SARS outbreak of 2003 and the H1N1 flu outbreak of 2009 caused the sharpest market declines at the time, but viewed through the lens of history both appear to have barely left a mark on the long-term trend in equity markets.
The question you therefore need to ask yourself is simply this:
‘Given our past history of dealing with biological threats to the human race, some far more lethal than COVID-19, what unequivocal, objective evidence do I have that this time will be different?’
If the answer is ‘none’, then as an investor the best single thing you can do for your long-term prosperity is exactly….nothing! Or as the late John Bogle, founder of Vanguard, was fond of saying… “don’t just do something; sit there”.
Inactivity is Your Superpower
It’s one of the financial industry’s dirty little secrets that a lot of people benefit from individual investors like you occasionally panicking. Stockbrokers, the stock exchanges, market makers, financial market websites, the data providers that power them, all the way to high-frequency traders and proprietary desks at financial institutions all waiting to trade against you, the so-called “dumb money”.
Individual investors trade too often while having the stalest information, face the highest trading costs and are, in all fairness to the insto crowd, easy pickings due to a tendency to overreact to bad news.
You can, however, turn the tables on the pros and instead make inactivity your superpower. But you’ll have to be able to sit on your hands when everyone else you know is losing their sh*t.
Starting with this stern test of your superpower, the COVID-19 virus.
This material is intended to provide background information only and does not purport to make any recommendation upon which you may reasonably rely without further and more specific advice. To the extent that this material contains advice: (i) this is limited to general advice only; (ii) has been prepared without considering your objectives, financial situation or needs; and (iii) because of this you should therefore consider the appropriateness in light of your objectives, financial situation or needs, before following the advice. To the extent that this material contains any advice, we recommend that you do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.
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