Random Thoughts – Stock sell-offs, Coronavirus, Recession Coming?

Well, originally I had another post scheduled to go live today, but given what’s going on with the market in the last week and a half, I decided to write a post and examine the situation.

The last week and a half sure has been very interesting. Although COVID-19 (the coronavirus) started to get more media attention in late January, the majority of investors ignored this infectious virus and the stock market kept going up. In fact, some stock indices reached all-time highs in mid-February. The positive sentiment started to change on February 19 once the virus started to spread in other countries, causing major panic. Since then, we saw the fastest stock market decline on record.

MW IB092 CXslok 20200227163001 NS

At the time of writing, there are over 87,000 confirmed coronavirus cases worldwide and close to 3,000 deaths. South Korea reported more new cases than China for the first time. More and more countries have reported their first confirmed cases. If you think the virus is not a big deal at all and the stock market is just having a “fit,” you should reconsider. The virus is already causing a significant economic impact all over the world. There’s no doubt in my mind that it will take some time to recover the economic impact of the coronavirus.

Personally, I have already seen impacts caused by the virus at my work. Our office in Shenzhen, China was closed for almost a month. All of my co-workers over there were forced to work from home until last week. Some of them are still quarantined at home because they had just returned from another province. Since most of them are in R&D, this has impacted product schedules and overall productivity. In addition, the virus has caused factory shutdowns and component shortages. We can’t ship products to our customers due to a lower production rate than normal. Just the other day, the HR department sent out an email to everyone stating not to travel to mainland China, Iran, Italy, or South Korea for any reason. All non-essential travel to other APAC and European locations should be postponed. I have no doubt that things will only get worse over the next few weeks. The overall company productivity has been impacted and this certainly will impact our Q1 results, probably the rest of 2020 too.

This is just one example. A mid-sized high tech company. Now imagine what kind of impact the coronavirus is causing to other companies all over the world. The virus is not just causing problems for big international companies like Apple, Google, Procter & Gamble, Coca-Cola, Disney, and Amazon. Every company, whether big or small, is being negatively affected by the virus, one way or another. It would not be a surprise to see some companies reporting a revenue decline in 2020.

So no, the market is not overreacting at all. All these market sell-offs are warranted.

This leads to the next very important question – will the coronavirus cause a global recession?

I am not a fortune-teller and I can’t predict the future but based on all the global economic impacts that the virus has caused, I think it is highly possible to see a global recession.

This just to shows how interconnected the global economy is nowadays!

The Coronavirus

The scary thing about the coronavirus is that it is highly contagious and spreads quickly. According to studies, the estimated R0 (the reproduction number) ranges from 1.4 to 6.49. In comparison, the R0 for SARS was <1 to 2.75 and the R0 for seasonal flu is 1.3. That means a person infected with the coronavirus can potentially infect up to 6 people (rounded down). Then these 6 people can infect 6 more. And pretty soon you have thousands of people infected.

2020 covid 19 vs sars

The biggest problem with a high R0 is that a large number of people can get sick quickly and many will require medical help. During the flu season, let’s guesstimate that 30 people go to a local health clinic each day to get treated. One or two of them may need additional medical attention and go to the hospital. With the coronavirus, imagine 200 people going to the same local health clinic each day and 20 or so of them need additional medical attention at the hospital. All of a sudden, the medical clinics and hospitals do not have the capacity to see everyone. Patients can’t be treated on time, hospitals are packed with people, medical supplies running out, and more and more people are getting sick. Things can get extremely chaotic and dangerous!

For the most part, the majority of the coronavirus patients recover. But around 3.4% of them end up dead (note: I’m just calculating using WHO’s numbers, I have also seen reports stating ~2.5% fatality rate). Scientists believe if we can’t contain the virus and no vaccines are created, 40-70% of the global population could eventually contract the virus. Given there are 7.8 billion people living on earth, 40-70% means anywhere from 3.12 to 5.46 billion people can potentially contract the virus. At the 3.4% mortality rate, that means 106 million to 188.37 million people!!! At 106 million people that’s like wiping out the entire population of Canada (37.59 million), Taiwan (23.78 million), Denmark (5.603 million), and the state of California (39.56 million). Damn! 

Should I be worried?

While these numbers are pretty crazy, personally, I am not too worried about the coronavirus. Yes there are confirmed cases in Canada and the US today but the virus isn’t spreading like what we are seeing in China, South Korea, Iran, and Italy. However, it’s not whether the virus will spread in Canada and the US or not, rather, I think it is simply a matter of when. The virus is coming to North America and the rest of the world, and we need to be prepared for it.

But why am I not too worried?

First, I believe the 3.5% fatality rate is inflated (even the 2.5% may be inflated too). I believe many people that caught the virus in China early on may have thought they had the flu, recovered, and never got tested. Furthermore, there are confirmed cases where the patients do not have any cold-like symptoms. This makes me believe that the number of confirmed cases is probably higher than what has been reported. A higher number of people infected with the disease means a lower percentage of fatality rate (simple math). Now, you may argue that there are probably more deaths in China that were caused by the coronavirus that weren’t reported. Yes, you are probably right, but the number of people infected with the virus is probably much higher than the number of people who died from the virus. Therefore, my argument should still hold true. (New studies have pointed out that the fatality rate may be lower than previously feared, closer to 1%).

Second, preliminary data shows that the fatality rate is higher with certain demographics of the population. There have been no deaths in kids 9 years old and younger. The fatality rate is the highest for people above 60. The fatality rate for people aged 60-69 is 3.6%; 8% for people aged 70-79; 14.8% for people above 80.

In the age segment for Mrs. T and I are in (30-39), the fatality rate is 0.2%. Since there are no deaths for kids younger than 9, I am not concerned with my two kids. Therefore, the four of us should be relatively safe even if we were to catch the virus. For my parents and Mrs. T’s parents, because they are in the age 60-69 segment, I am a little bit more concerned about them. But for the most part, they are all quite healthy, and given the good medical systems in Canada and Denmark, they should recover if they were to catch the virus.

While I’m not too worried with my immediate family. I am concerned about the spread of the virus. There are people that are immunosuppressed living all around the world. The coronavirus and the complications from the virus can be extremely dangerous to these folks. Therefore, it is important to reduce the spread of the virus and keep these people from contracting COVID-19. When these medically vulnerable people contract the coronavirus, it is vitally important that they can get medical treatments.

There’s hope, though. Thailand has claimed to use a “Thai cocktail” of HIV and flu drugs to treat an elderly woman who had severe COVID-19-related pneumonia who has had a full recovery since. If the Thai cocktail treatment is proven to be effective, this should reduce the fatality rate even further.

Not to mention that scientists are working hard to understand more about the virus. Although a vaccine may not come any time soon, I strongly believe that effective treatment(s) will be found to help people to recover from the virus.

What about the stock market?

As mentioned before, there’s a good chance that we will see a global recession. The stock market may crash 40-50%, just like what we saw during the financial crisis.

But we need to remember, the recession is typically a short term event. Since the Great Depression, recession durations have lasted no more than 1 year 6 months in the US.

You may think one and half years is a long time but as a long term investor, that’s a tiny blip on the chart. If you are investing in the stock market, you need to consider the long term. I am not talking about one or two years, more like 10, 20, or even 30 years from now. Remember, the stock market has a historical long term return rate of 8%. Invest for the long haul!

Rather than jumping into and out of the market and freaking out whenever you hear good and bad news about the market, invest as if you are running the business. Will people stop using Royal Bank and their financial services because they are in bed recovering from the coronavirus? Will people stop using their cellphones because they are sick from the coronavirus? Will people stop producing garbage because they quarantined themselves at home and therefore do not need any garbage removal? Will people stop heating up their houses because of the virus?

Probably very unlikely.

This is why I like companies that pay dividends. Most of these companies sell products that people rely on.

So businesses may suffer because of profitability declines caused by a slower rate of consumption. But it’s unlikely for the poor profit to continue for many years. Once the virus gets contained and effective treatments and vaccines are available, life will get back to normal. The world population will continue to buy things and continue to consume.

Another thing to remember, although the stock market tumbled the fastest rate ever, we need to put things in perspective.

Here’s the one-year view of the S&P 500. The sharp decline in the last week and a half is certainly quite noticeable.

SP 500 one year chart

Here’s the five-year view of the S&P 500. The decline that we saw in the past week and a half is a small blip on the chart.

SP 500 5 year chart

Finally, here’s the max view of the S&P 500, dating back to 1980. Again the +15% drop is barely noticeable and there are way scarier drops on the chart. 

SP 500 max chart

The lesson here? If you had stayed invested throughout the last 40 years, you are doing quite well as the S&P 500 went from 113.66 on Feb 29, 1980 to 3,337.73 on Feb 29, 2020, an increase of 2,836.59% or about 22% annualized. (This is a lot higher than the 8% historical return that I mentioned, but we are only looking at the S&P 500, rather than the entire market).

Should I be buying?

We have been buying dividend-paying stocks and index ETFs throughout February but before the sharp decline. What can I say, I suck at timing the market. Ha!

If we look at the charts, we’ll notice that the S&P 500 has gone back to the level it was around October 2019. Sure the stock market is lower than the beginning of February, but I don’t think the market is at a bargain yet. I mean, back in October, if you were telling yourself that the market was overvalued, what makes you think the market is now super cheap? And if you weren’t buying in October, what factors are you using to convince yourself that now is the right time to buy?

Let’s not forget, timing the market doesn’t work. Nobody knows when the market is at the peak or at the bottom.

If we look at the Shiller PE ratio, which is the price to average earnings from the past ten years, we can see that the ratio is still high.

Shiller PE ratio

Now, it’s certainly not the case that everything is expensive. There are certainly some bargains out there. For one, I think the Canadian banks are at a good discount to pull the buy triggers. But who knows, maybe the drop will continue for another week or another month, so I am not in a hurry to pull the buy trigger immediately. Rather, I am going to wait a little longer, increase my cash pile, and see what happens. I’d like to remind readers again that I believe in time in the market rather than timing the market. I typically deploy cash on a regular basis so our cash pile isn’t at a high dollar amount. Given the current situation, I may adjust this dollar amount target a little higher and wait for a little longer than usual before buying something.

Having written this long random thoughts post, I’d like to hear what the readers think. Are you concerned about the coronavirus? Are you buying more stocks? Or are you holding off for a bit?

P.S. Mr. Tako, who is way smarter than me, has written a similar article. I think you should check it out. 

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33 thoughts on “Random Thoughts – Stock sell-offs, Coronavirus, Recession Coming?”

  1. Nice write-up, couldn’t agree with you more. I think the problem is that there is too much talk about it. Every year there are different strain of flu rolling out and a lot of people get sick. Some die, but most of the recover. If this virus is that serious of a treat, we shouldn’t wait until millions get infected. There should be a national-wide lockdown for 30 days to stop the spread. Yes, the economy will dip, but who cares… it’s only on paper. Once the spread is over and everything is back to normal then we will recover pretty quickly. In fact, it will be the fasted recovery of all times, because the sell-off is based purely on fear. Just my opinion.

    Reply
    • Thank you German. I originally didn’t plan to write a post on my thoughts but felt it was important to say something. Sadly, it’s all fear based. The news is pumping out a lot of articles and scaring people about the coronavirus. You’re right, every year there’s something that scares people and affects the market in a negative way. Having said that, we should look into ways to reduce the spread of the virus so older folks and people with existing medical conditions aren’t in danger of catching the virus.

      Reply
  2. Im not sure what to think on all of it. It is all a bit different as well watching this not working and trying to live off my dividends in my FIRE spectrum of this way of living. Having an income with a big stash of FU money makes it easier to look at this event as something you can easily weather. That being said if I really had to it should be quite easy for me to find a basic job. As for the virus, well I will just wait and see what happens. That being said I have decided to not fly yo Calgary during the March break to see family, I would rather avoid Vancouver and Calgary airports.

    Reply
    • Having an income with a big stash of money will help during a downturn, that’s for sure. I think the public is scared about the virus because of all the media coverage. The reality is, most people will end up having similar symptoms as regular flu. The worrisome are older people and people with preexisting medical conditions. We need to do all we can to help stop the spread of the virus.

      Reply
  3. Simple question: by waiting and sitting on a pile of cash rather than buying on a regular basis, aren’t you market timing?

    For me, I don’t care what the market does. I buy every two weeks by value averaging using TD e-series funds.

    Reply
    • We have been regularly purchasing stocks rather than sitting on the side. Just have a small amount of cash sitting around so I wouldn’t call that market timing. 🙂

      Reply
  4. Great insight and logical approach to the coronavirus impact. It might slow down or it might speed up. No one knows and the market correction is a better buying opportunity for long-term investors. I put close to 10% of my total portfolio in XOM stock last Friday (investment thesis linked on my name). And I’d welcome an even bigger stock market drop by putting more of my cash to work.

    Reply
  5. So Tawcan. Do you have any sense as to whether we can believe the Case numbers coming out of china? If we can trust them, they have peaked already. And if they can hold, that’s a pretty good sign.

    You have put some thought into this. As have I. We are actually fairly aligned. I believe the death rate should be much lower for the same reasons. Also believe spread is inevitable. However I think slowing it down is the best defense for now. Then just maybe when summer arrives it will slow on its own. Or I read it can even mutate to be more difficult to transmit. I think Sars did that.

    Reply
    • I’m not sure if I can fully trust the case numbers coming out from China. I’d trust the numbers coming out from South Korea and Italy more. Having said that, if the peak is already past in China, that’s definitely a good sign.

      Yes, typically with the flu the spread rate slows down in the summer. Hopefully this will be the case for the coronavirus too.

      Reply
  6. I’m going to stick with my asset allocation strategy and not try to time the market. I’ll let my financial model sort them my asset allocation and continue to invest consistently irrespective how the market is reacting to the noise. More time in the market!

    Reply
  7. Nice post Bob. For sure its media hype. That’s all everyone is talking about. My son just went to disneyland (well hes there) the place isn’t packed but its not dead either. Perfect time to go.

    I think we will feel the economic impacts in the next 2 quarters. I have heard a lot of storys just like yours. People couldn’t even get a hold of their suppliers in China because no one was there. They are responding now but there’s a huge backlog. This is why i’m not in a big rush to deploy my little cash pile. Ill keep buying bi weekly/ or monthly just like usual.

    Like you said there’s certain businesses out there that will continue doing well at the moment. Banks for sure, but lower interest rates and possibly a recession ain’t good for them. Utilitys & telcos on the other hand……..

    I like all the info you had on your post, the sars comparison especially. I just wrote up a post briefly touching on the covid issue. For me it seems a lot like Sars. I’m just waiting for Toronto to host the Covid-stock 2020. (instead of sars stock)

    For some reason this cruise ship was the worlds science experiment. Everyone was watching. Of course its going to spread fast on a ship with the same hvac system circulating the place.

    Wish the best for everyone’s health, just think its a little blown out of proportion.
    cheers Bob

    Reply
    • Nice time to go to Disneyland when it’s not packed. 🙂

      Yea we’ll definitely feel the economic impacts in the next few quarters. I do think things will pick up and fear will reside

      Reply
  8. I’m not too worried personally because our family is young and healthy. However, I think the US stock market has a lot more room to drop. The coronavirus will hit the US really hard. Workers don’t stay home when they’re sick. Kids are sent to school because parents can’t stay home. The healthcare system is screwed up. How many people can afford 2 weeks of quarantine or getting real care at the hospital? I foresee many bankruptcies in the coming days. I hope we can contain it, but I’m not optimistic.
    I’m averaging in and moved some money into stock. If it keeps going down, then I’ll buy more. We’ll see how it goes.

    Reply
    • Yea the stock market has a lot more to drop. Maybe the interest rate drop will help stabilize the market a little bit. Who knows.

      You’re right, not many people can afford 2 weeks of quarantine in NAM. That’s worrisome.

      Reply
  9. The fact the China quarantined large cities and Japan is considering what they need to do wrt Olympics should give everyone something to think about.

    It could be as bad as the Spanish flu especially considering the second wave and the effects reinfections have on the human body.

    I wish I was wrong but all the data I’ve seen from China (official and unofficial) sources suggest otherwise.

    My post on this topic is not as cheerful mainly due to the errors I’ve seen so far wrt handling the pandemic.

    Reply
    • I think how quickly the virus has spread is concerning. Nobody seems to be able to get an accurate fatality rate which is a bit concerning too. Hopefully it won’t turn the Spanish flu version #2.

      Reply
  10. Great write up as always! Any thoughts on purchasing Royal Caribbean stock based on the last few weeks? RCL pays a nice dividend and is down almost 45% since the downturn. It’s P/E ratio is also in single digits at the moment. I feel like as the virus slows down investor may decide to jump back in as people aren’t going to stop cruising. Definetly feels undervalued and still going down.

    Reply
  11. Great post. I just bought some more BMO.

    I’m concerned about the COVID on our health care system. There are fewer cases here right now because there are strict guidelines from CDC of when you can test- right now only testing people who respiratory symptoms traveling from certain countries.

    Reply
  12. Great article Bob. It is hard to comprehend this at times and understand the full impact of the virus. Heck, that is why the market violently swings from day to day. That’s why, as you said, think with a long term mindset. The dividend paying stocks we invest in, ones that have paid dividends through various economic cycles and sudden, new medical conditions, will continue to pay a dividend long after the coronavirus. Just stick to your investing strategy and move onward.

    You did bring up an interesting point, one that Lanny and I have talked about. The market may be down, but it is still high. Your chart showed it perfectly. Despite the decreases, we are still trading at October 2019 levels.

    I think Q1 earnings season is going to be fascinating. Once companies are forced to share results, we will truly see the impact the coronavirus has had on global businesses. That may be the second round of the market beatdown….

    Thanks for the excellent read this evening.

    Bert

    Reply
    • Long term mind set is important. The thing with dividend investing is that, if the companies don’t cut dividends, who cares if the stock price went for a dive?

      Reply
  13. Solid article Bob and very intelligently written. At this point you are more likely to die in a car accident then from the virus. Take precautions though as with anything. Do up your seat belt, wear a ski helmet, wash your hands and eat well. You can do everything you can to protect yourself and still **it can happen. We can’t live life in a bubble nor can we live recklessly Educate yourself and take smart risks. I’m not inclined to go on a cruise anytime soon though. My wife had a cousin die from complications from H1N1. She was young but not that healthy. Very sad. For goodness sake if you are sick stay home. The world can go on without you for a few days!
    Wish everyone good health.

    Reply
    • Practice good personal hygiene is definitely a good idea but things can still happen. But we also need to remember, the vast majority of people that contracted the virus had mild or almost no symptoms. Sorry to hear about your wife’s cousin.

      Reply
    • Practice good personal hygiene is definitely a good idea but things can still happen. But we also need to remember, the vast majority of people that contracted the virus had mild or almost no symptoms. Sorry to hear about your wife’s cousin.

      Reply
  14. Well thought out write-up, Tawcan! The numbers are actually kind of scary. I haven’t looked into the numbers much before reading this. But of course, I agree with your long term approach to the market. I try not to worry about situations I can’t control. So it is business as usual for the portfolio.

    Reply
  15. Definitley watching and waiting. As soon as things start to settle, its time to BUY. This won’t last forever. Tragic for the ones directly affected though. I do hope it doesn’t last much longer.

    Reply
  16. With the VIX Index moving up, it may be a good time to sell out of the money PUTS for shares you are interested in buying or covered CALLS to take advantage of the higher option premiums.

    Reply

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