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.
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 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.
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.
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.
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.
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.
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.