In spring of 2003, I was invited to visit John Martin, a close friend of mine and a big-time currency trader. John and his family lived in Singapore, and the world was on the tail-end of the SARS (severe and acute respiratory syndrome) breakout.
My roundtrip plane ticket only cost about $700 and the wide-body jet I was flying in to Hong Kong was less than a quarter full. The SARS scare had hit the airline and travel industries hard.
Fast forward to October of 2014. The Ebola crisis that caused 15 times more deaths than SARS broke the containment of west Africa and the U.S. stock market dropped 7.5% in less than five days. As of Tuesday morning, the spread of the coronavirus has claimed 106 lives.
And while the response to contain the virus has been quicker than in past instances, many are concerned about the market impact of the infectious disease. History tells us that we likely won’t see a significant impact outside of some short-term headline risk.
This outbreak has a Reality Gap much like past ones – driven more by the media’s need for viewers and readers than by the reality of the situation.
It’s an important story to be sure, and heartbreaking.
When people in Wuhan, a city in central China, first started getting sick last December, the Chinese government underplayed it.
They said there were no signs the disease had been transmitted from one human to another, and they quickly ruled out that this illness could be caused by the virus behind the 2003 SARS outbreak.
That deadly SARS virus spread to more than 8,000 people, killed 774, and sent stocks tumbling across the region.
Traders still remember that, so China’s reassurance and the limited scope of the outbreak kept them calm. But last week, the news did jar the markets. As recently as ten days ago, China was reporting just 62 cases and two deaths. But reports were already coming out about possible cases in Thailand, South Korea, Japan, and the Philippines.
A day later, the news was starting to add up. China announced that in Wuhan alone, there were 168 cases and four deaths.
Not only had the number of cases at the source of the outbreak almost tripled, but at least 14 of the infected were medical workers who had caught the disease from a patient.
In other words, the virus, now confirmed to be a relative of the SARS virus, had spread from person to person. Cases have now been officially reported in the three major business centers of Beijing, Shanghai, and Shenzhen.
Markets across Asia tanked as this news hit last Monday evening just after 8 p.m. EST. And here in America, traders followed suit with quick 130-point drop in the Dow in afterhours futures trading. By the end of the U.S. Trading day last Tuesday, the first air passenger with the virus had hit U.S. soil and I had been on Fox Business Network and Bloomberg radio answering questions about the market impact of the virus. The China large cap index was down -4.5%.
As the week progressed, the outbreak grew in size. As I’m writing this, the number of cases worldwide has risen, according to the BBC, to 4,515 confirmed cases and another 5,794 suspected. Of those, there are five confirmed cases in America so far. Heartbreakingly, there have been 106 deaths, most in China’s Wuhan province, where the outbreak began.
With wall-to-wall coverage in the papers and news channels, and markets dropping as new cases appear, it’s hard not to be concerned.
The truth of the matter is that the market’s modest response is telling us important information. This outbreak is worrying and unfortunate, to be sure.
But a horrific pandemic is nowhere in sight.
Instead, here’s what’s really happening – and what you can do about it…
Coronavirus is not Nearly as Dangerous as it Sounds
First things first: with 4,515 cases and 106 deaths, the fatality rate for this new coronavirus is around 2%.
To put that in perspective, the 2014 Ebola outbreak killed close to 70% of those who contracted the disease in the early part of the outbreak and almost 50% of all infected.
That same year, the flu killed 8.6% of all hospitalized patients in America alone. That was 51,000 deaths that the media and markets barely batted an eye at.
Now, these numbers all have to be taken with a grain of salt. Especially for diseases like the coronavirus or the flu, where similar symptoms can be caused by a variety of bugs, the numbers will always be estimates.
But the takeaway is that this new virus is not only significantly less deadly than SARS and Ebola, but also than the flu.
So far, the American cases of the coronavirus are recovering just fine. The virus seems dangerous in the same kind of cases that the flu is: people over 65, with immune problems, or with serious conditions. The youngest death so far was a 48-year old suffering from diabetes and a stroke.
So when it comes to your personal safety, you have no reason to worry. The media could be hyping this up because we were in a news drought, but that’s just them trying to make you stay glued to your TV.
There’s nothing to worry about here in the U.S. right now. If you’re really concerned, and haven’t yet, go get your flu shot.
But real or hype, the China virus story has had a serious effect on markets. On Monday morning, the Dow opened down 460 points on reports of new cases.
Looking back at past disease scares, you have nothing to worry about here either. In fact, this may be a good opportunity…
The Previous Outbreaks: Fast but Short-Lived Moves Down
The past provides no guarantee of the future, as we all know. But it’s a good guide. Let’s look at how markets reacted to another disease scare from Asia.
Back in 2003, the SARS virus had a broad psychological impact, with near-panic conditions spreading across the Asian region and sending economies there into a stall pattern.
For example, Hong Kong’s Hang Seng stock index dropped more than 9% from March to May, before recovering once the outbreak came under control:
This new outbreak is already showing some concerning similarities to SARS.
For one, the viruses are related, and both spread from animals in markets to humans.
With the virus now spreading person to person, this sickness is still taking a heavy toll.
And there is a big exacerbating factor – this past Saturday marked the Chinese Lunar New Year. It’s one of the biggest holidays in China, and much like Thanksgiving here in the States, it involves people travelling home to their families. This celebration has been called the largest annual human migration in the world.
So, late last week hundreds of millions of people travelled by train, plane, or car to see their loved ones. It is estimated that up to five million people left Wuhan before the travel quarantine went into place. This could speed up the spread even more and increase the risk to both people and economies. It will be a very tough stress test for the protective measures put in place against further spread.
Already, the Chinese government has closed down roads, train stations, and airports in affected areas. It’s also extending the Lunar New Year holiday until at least February 1, to prevent travel and people infecting one another at work.
But an important difference in this outbreak is the fact that the Chinese government has not been downplaying the news for as long this time.
At the beginning of the SARS outbreak, Chinese authorities seriously underplayed the virus for months. There were documented cases of undercounting in military hospitals, coverups, and a ban on foreign experts investigating the outbreak.
This time around, China has been more responsive. The World Health Organization is already involved in handling this latest outbreak, several Asian countries are already investigating possible cases, and the U.S. Centers for Disease Control and Prevention is coordinating screenings for travelers from Wuhan.
Meanwhile, the original source of the outbreak, a live-animal market in Wuhan, was closed and sanitized on January 1.
And while there is a high probability that we’ll see other temporary market blips from unfortunate news about the virus, the longer-term outlook for any market upset from the virus is small. Here is an informative table put together by Dow Jones Market Data:
My main takeaway from this data is this: after the short-term market gyrations are over, the longer-term market effects of disease outbreaks in decades past have been minimal and far overshadowed by other market factors.
I will be monitoring news from the Lunar New Year travel, but I’m not significantly changing my mid-term trading outlook, other than avoiding travel-related stocks.
In the short term, to protect your money, you need a safe haven.
I suggest the Health Care Select Sector SPDR Fund (XLV) ETF. This fund tracks the healthcare and pharmaceuticals industries, which will see some upside if this new virus spreads.
Even better, healthcare stocks have been doing very well even before the coronavirus outbreak. My BetaFlow traders have made 100% or more gains three different times on XLV, all in the last two months.
It’s the best play to protect your money as this tragic outbreak continues.
I also believe there are good plays in a snapback rebound for casino stocks (like WYNN), travel stocks (like UAL), and in China-based stocks (like BABA) – though those will be more susceptible to headline risks than XLV.
I’ll also be keeping an eye on signs that the virus-driven market dip is bottoming out. That would be a perfect opportunity to get back in. This could happen as early as this week, with a record number of huge earnings reports on the schedule.
With 14 of the Dow 30 and 141 of the S&P 500 reporting this week (and more next week), positive earnings news could jolt the market out of its temporary focus on the virus outbreak.
Great trading and God bless you,
D.R. Barton, Jr.