The stock market will periodically sell-off due to fears of one “black swan” event or another. Today the latest brick in the “wall of worry” the market always climbs is the Wuhan coronavirus outbreak which began on December 31st.
As I write this the S&P 500 is down 1.5% and many economically/trade/tourism sensitive companies are down two or even three times that.
However, the worst possible time to make important portfolio decisions is when the market/world is in the grips of overblown fears over one risk or another.
So here are the three most important facts to know about the Wuhan outbreak and the actual threat it poses to your health and nest egg’s well being.
Fact 1: Wuhan Coronavirus Is NOT Threatening to Become a Global Pandemic
Eric Toner, a scientist at the Johns Hopkins Center for Health Security back in late 2019 ran a simulation of a global coronavirus outbreak that resulted in a global pandemic that according to Business Insider “Toner’s simulation of a hypothetical deadly coronavirus pandemic suggested that after six months, nearly every country in the world would have cases of the virus. Within 18 months, 65 million people could die.”
For context, the 1918 Spanish flu outbreak, which was spread by WWI troop movements, killed an estimated 50 million people.
His model also found that global GDP in such a worst-case scenario would fall by 11% and send global stock markets down 40% to 50%. But before you sell your portfolio and hide under the bed consider what Mr. Toner just said about this outbreak.
We don’t yet know how contagious it is. We know that it is being spread person to person, but we don’t know to what extent…An initial first impression is that this is significantly milder than SARS. So that’s reassuring. On the other hand, it may be more transmissible than SARS, at least in the community setting.” – Eric Toner
In his hypothetical outbreak model, Toner assumed that no vaccine was found and that the coronavirus (same viral family as the common cold) was as easily transmissible as its milder cousin.
However, here are the actual facts as we have them, as tracked by John’s Hopkins.
(Source: Johns Hopkins)
- 2,886 confirmed cases in 62 countries and territories
- 2,839 cases are in China/Hong Kong or Macau (98.4% of cases)
- No significant outbreaks in other countries, just individual travelers from China who are being isolated and treated
- 81 deaths = 2.8% mortality rate (vs 9.6% for SARs and 34.4% for MERs, 1.8% for flu)
(Source: Johns Hopkins)
If 2019-nCov (the scientific classification of the virus) were more transmissible than SARs then we should be seeing rapid case growth in many countries. Instead, we’re seeing a handful of cases from patients who traveled from China.
These are being isolated and the patient’s treated, with most reports being of non-life threatening respiratory symptoms. A handful of cases outside of China involve pneumonia, that is not resulting in a significant number of deaths.
- Wuhan is thus far 12 times less deadly than MERs
- Wuhan is 3.4 times less deadly than SARs
Thus far Wuhan has proven 8,000 times less lethal to the global human population than the common flu.
And it’s very likely that should this disease spread that it won’t prove anywhere as scary as hypothetical worst-case scenarios might lead you to believe. Researchers have sequenced 2019-nCov’s genome and expect to begin human testing on a vaccine within three months
For context, SARs took 20 months to have a vaccine ready for trials, by which point the outbreak was over and it wasn’t needed.
Global health officials have been preparing for something like this for 17 years now, and have protocols in place to rapidly stop the spread of infectious diseases.
China, for example, has eight cities (and counting) on severe travel restriction, covering 56 million people. Air travel between affected areas has been banned, hundreds of public events canceled, and school holidays extended nationwide to February 17th.
China is not lying down about Wuhan corona, but acting reasonably, prudently, and swiftly to avoid the catastrophic global pandemic that so many are worried about.
But won’t such actions result in severe economic disruption? Indeed they will, in the short-term. But that doesn’t mean the world’s economy (or stock market) is about to go over a cliff.
Fact 2: China’s Economy Is Likely To Be Affected In The Short-Term But It Will Likely Bounce Back Quickly
China’s economy in 2003 saw growth cut 2% due to the SARs outbreak, from 11% to 9%. In Q3 2003, growth rebounded to 10%, one quarter after the outbreak ended.
This time is different in that China’s economy was expected to grow by 6% in 2020.
China’s economy is now more mature and expected to see a steady deceleration in growth rates for the foreseeable future.
The Economists’ intelligent unit estimates that the Wuhan outbreak will reduce China’s GDP growth in 2020 about 1%. AllianceBernstein’s model says 0.8% to 1.9%, depending on how long the outbreak lasts (3 to 9 months).
According to Bloomberg, in 2019 33% of global economic growth came from China. A 1% to 2% decrease in GDP growth in that country thus could reduce global growth by 0.3% to 0.7% this year.
That implies that global growth, which was the weakest since 2009 last year, could come in at 2.6% to 3.0% in 2020.
That is technically a “global recession” which the IMF defines as sub 3% growth.
The good news is that any slowing in growth this year is temporary. And in the future, Bloomberg estimates that strong growth in emerging markets will lead to a more diversified world economy. One that is far less reliant on China’s growth to fuel economic progress.
But that’s the long-term future! What about the potential for a market crash in 2020? Surely this outbreak means that “this time is different” and it’s time to bail on stocks, right? Actually, the facts say the precise opposite.
Fact 3: This Outbreak Is NOT a Reason to Sell Your Stocks
The terrifying notion of tens of millions of people dying and the world’s economy being left in tatters might make you think that it’s a good idea to sell stocks and wait for this crisis to end.
Market history surrounding outbreaks says the exact opposite.
Here are all the major outbreaks that have occurred over the past few decades, and how global stocks have reacted in the short-term.
- 69% of the time stocks are down slightly over a month
- 69% of the time stocks are up within three months of the outbreaks becoming official
- 69% of the time stocks are up within six months, on average 8.5%
Chances are good that this outbreak is will shorter and less painful than the SARs outbreak of 2003. That’s the outbreak in which stocks kept on recovering from the 2001 recession and tech crash which resulted in reasonable market valuations.
If you panic sold out at the start of the SARs outbreak here’s what you missed.
Broader Market + Quality Dividend Stocks During SARs Outbreak
Buy and hold investors made 11% to 60% returns during the SARs outbreak of 2003. Some fell into a correction at the height of the scare but that proved to be a great buying opportunity as it almost always does with quality companies.
I’ve dedicated my life to finding quality companies for long-term dividend growth investors to buy, regardless of what current events or economic conditions have the market spooked at any given time.
The secret is to use the best probability-based/ methods which means
- sound risk management
- a diversified portfolio of quality companies/income-producing assets most likely to meet your needs
- let competent and trustworthy management teams work hard so one day you won’t have to
- focus on your annual dividend stream NOT the day to day fluctuations in your portfolio
My Retirement Portfolio’s Dividend Profile
|Total Portfolio Income||Average Monthly Income||Average Daily Income||Net Yield On Invested Capital|
On days like Monday, when almost all stocks are running deep red, this is what keeps me calm, rational and disciplined.
Inflation-Adjusted Dividend Forecast
|Years From Now||Annual Portfolio Income||Daily Dividends||Hourly Dividends|
(Sources: Google Sheets, Morningstar)
All I have to do is ignore this latest example of market noise in order to achieve my goal of dividend funded financial independence.
Periods of market volatility? They are nothing but buying opportunities for those with the right watchlist of quality companies during periods of increased market anxiety.
(Source: AZ quotes)
Speculators pray for luck, disciplined SWAN (sleep well at night) investors create their own.
Monday morning I bought no less than four great dividend stocks, at deep discounts to fair value, precisely because panic sellers made knee-jerk reactions that are almost certain to be proven wrong.
Hopefully, articles like this help to show why trusting in prudent risk management, not market timing, is the way to sleep well at night when frightening current events such as this occur.
These are the risk management rules I entrust my life savings too, and the Dividend Kings’ portfolios I run.
Bottom Line: The Wuhan Outbreak Is a Tragedy for Individual Chinese Families But Not a Major Threat to the World’s Health, Economy or Your Portfolio
I know that the idea of a deadly virus sweeping the globe and laying waste to the world’s economy is scary. Your first instinct may be to sell all your stocks and wait for more clarity about this potential life/death situation.
The potential pullback that I’ve been warning about for weeks might be here. The market’s previous euphoria has now flipped to fear and many investors are blindly selling first and asking questions later.
But rest assured that 99% of the time selling out of fear is a mistake.
History is very clear about a few things when it comes to finance.
- epidemics are almost never a medium-term threat to stocks, much less a long-term one
- market timing is almost always a horrible mistake and the reason for market volatility doesn’t change that
- stocks are the best long-term asset class to own. If that ever changes it means the world’s economy has shattered, and we’re likely too dead to care about portfolio returns
I’m not ignoring the Wuhan viral outbreak, I track it daily. But that’s for the same reason I track the broader market and economy each week. Not because I trade around macro events or broad market valuations, but purely to keep my readers calm, rational and help them avoid making costly mistakes.
If you sell out of fear of this latest viral outbreak you’re almost certainly losing money for no reason.
Just as SARs, MERs or numerous other outbreaks didn’t derail the global economy or permanently shatter the stock market, Wuhan coronavirus isn’t likely to either.
Thus the correct course of action for almost everyone is
- trust your long-term investment plan, which includes prudent risk management exactly for times like this
- if you have no buying power to put to work, ignore your portfolio and the market entirely
- if you have discretionary savings to invest, take advantage of this latest overblown threat to world health/economic growth
My retirement portfolio and the Dividend Kings’ portfolio I run NEVER let a “crisis” go to waste. Every market downturn is an opportunity for profit.
Armed with our excellent watchlist (the Dividend Kings Master List) we know precisely which companies are offering us the ability to follow Joel Greenblatt’s lead and buy “above average companies at below-average valuations.”
Rivers of safe and exponentially growing dividends and prosperous retirements are not achieved through masterful market timing. Rather it’s a result of steady and disciplined reasonable and prudent decisions over hundreds of weeks, months and dozens of years.
.INX shares were trading at $326.99 per share on Tuesday morning, up $3.49 (+1.08%). Year-to-date, .INX has gained 1.59%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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