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Market Update Feb 25th, 2020: COVID created an Overreaction?

Dear clients and friends,

The Last couple of days in the financial markets have certainly been interesting!  The major US indices are down about 6% over the last two days, putting them back to where they were in December.  The cause of the fall is fear over the coronavirus.

At first glance, this seems like a ridiculous reaction to a virus that has currently only infected 14 people in the United States.  Of those 14 people, 12 of them caught the disease in China and then travelled back to the US.  The other two people live with the people who brought it back from China.  There have been no deaths in caused by this virus in the United States.  I am sure you have seen the comparison to influenza which in the current flu season has infected over 30 million people in the US and killed tens of thousands in the last six months according to CDC data from February 15th.  So if that doesn’t concern us, why would a handful of cases of the coronavirus cause such a huge reaction in the stock market?

I see two possible answers.  The first answer is that it is purely an overreaction caused by media sensationalism.  If you recall back over the last ten years or so, you can recall other times that some disease from abroad was going to cause the end of the world according to the media.  Remember the bird flu, swine flu, SARS?  They all fizzled out and became relatively non-events, despite the fear that was generated at the time.  If that is the case, the markets should come to their senses very shortly.

The second answer to why the stock market is reacting so strongly is that people are panicking so much that even if the coronavirus has hit its peak and settles down from here, the economic consequences will be widespread.  Cities are shutting down, conferences are being cancelled, 13,000 flights per day are not happening because of this virus.  If you see a dozen cases of the flu, nothing happens, if you get a dozen cases of the coronavirus a city shuts down.  If governments continue to react this way, the economic impact could be astronomical.

Unfortunately, there is no way to know if governments and their people will continue to panic and shut things down at the first whiff of coronavirus.  I believe that it’s an overreaction, at least in first world countries and I doubt that this virus will end of being the plague that the media would have you believe.

In terms of your portfolios, I would advise a wait and see approach.  As I said, the markets have  lost a couple months of gains, so it’s certainly not something we should panic about right now.  We did a bit of selling in December to take profits.  We are not yet advising buying the dip as the wrong news could send the market lower.  We are waiting for a further decline before we plan on starting to buy.  If that never materializes, that is fine.  Keep in mind, we have brought your overall risk level down a bit as corporate profit growth slowed, so we are in a good position to buy if we do see a larger decline in the next few weeks or months.

As always if you have more questions or concerns, or want to talk about you particular situation, don’t hesitate to contact us.

Sincerely,

Alex Parrs

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