Why Is the Coronavirus so Dangerous to Your Investments?
It doesn't make sense in some ways. I would be surprised if the market did not react to the Coronavirus. Yet, is the market overreacting based on last week's losses? Let's consider the statistics.
So far, from October 1, 2019, to February 2, 2020, 16,000 people have died, and 280,000 people have been hospitalized during the 2019-2020 flu season, according to preliminary estimates from the CDC. A death rate of 5.7%.
For the Coronavirus, there are 87,000 confirmed cases in the world, with 2,900 deaths. A death rate of 3.3%. (as of this writing)
You don't see the market selling off because of the flu. Yet, there is more to it than these statistics. As you probably know by now, this is a highly contagious disease that can make you contagious up to 2 weeks before any symptoms appear. You can't react to this potential pandemic. Once it gets started, it is to late to take steps to minimize the destruction. The Federal Reserve announced that they were ready to lower interest rates as a means of softening the blow to the economy. Unfortunately, they also said that it would have to be a pandemic first. Once it gets to that level, I doubt that lowering interest rates will help. I question that it would help even now.
Thus you have to start taking precautions as if we were heading towards a pandemic. You have to be proactive as a country. Unfortunately, that has its pros and cons. That means canceling travel, conferences, events, trips, closing high traffic areas, etc. which will affect the economy. Fear starts to shape the behaviors of people. You have to remember it. Two-thirds of the growth of the economy is driven by consumer spending. If people change their consumer behaviors, then growth starts to contract, and you end up with a recession. Confidence is undermined, and fear is created, the more proactive a government becomes as a means to ward off a potential problem. The consumer could interpret being active as we are facing a much more serious problem than anyone knows.
We are also starting to figure out how dependent we are on China. We import a lot of products and resources from China. We depend on China's infrastructure to supply goods/resources. Today, that supply chain is hardly running. That not only disrupts the global economy, it also disrupts the American economy.
Finally, there is the stock market. This virus creates the ultimate uncertainty. The market has been going up based on the assumption of a perfect economic and corporate environment (as if that exists). The threat of and or the fear of this virus becoming a pandemic is not figured into the stock market's future. Just like during the financial crisis, today, the market and investors have considerable uncertainty - some of which is unprecedented. This uncertainty is what draws a parallel between the financial crisis of 08 and today. Do you have your portfolio ready for that type of situation?
The key is knowing your risk level and making sure you are comfortable with it. If not, find a risk level that you can be comfortable with and make the appropriate changes.