COVID 19 Update & Its Effect on Markets

Update: 12 March 2020
By: Bryan Mark Rigg, PhD

There is an old adage that the stock market goes up on an escalator and goes down on an elevator.  On February 12, 2020, the Dow Jones Industrial Average closed at 29,551 in record high territory.  One month later, the Dow traded at 21,347, a drop of over 27% into bear market territory.  An index drop of 10% is termed a “correction” and a drop of 20% is called a “bear market”. What a difference a global pandemic of the Covid-19 Coronavirus and a price war over oil between Saudi Arabia and Russia make!  Even a Trump presidential pep talk from the oval office, his blocking travel from Europe of non-Americans, and massive Fed liquidity intervention have failed to reverse the direction of the market.  Travel, hospitality and petroleum sectors of the market have been particularly hard hit including cruise ship companies.  On March 12, 2020, the Dow had its worst day since the 1987 crash.  The S&P 500 and the NASDAQ also fell into a bear market.  On the other hand, some stocks from other sectors have held up relatively well like cleaning companies and online service centers.  But these companies are a minority. Most major companies have pulled back on their prices.

This time of uncertainty in the markets, reminds some of what happened during the Spanish Flu epidemic from 1918-1919 which killed many young and otherwise healthy people.  While overshadowed by World War I, over 50 million people died in this tragedy.  After tremendous destruction, 11 million war deaths and many more injuries from four years of a World War, the broken-down infrastructure was incapable of dealing with the outbreak.   Many leaders, at first, wanted to keep it quiet for fear it would create a panic and hurt morale in society.  Philadelphia went ahead with its parade and rally to sell war bonds and thousands died. Not facing up to the disease facilitated its spread.  Medicine and science have come a long way since then and the Coronavirus is a very different illness.  In contrast to the Spanish Flu, it appears that Covid-19 is more of a threat to the elderly, especially those over 60 with underlying health problems.  The World Health Organization’s (WHO) early estimate is that Covid-19 has a mortality rate of about 3.4%.  It is already so widespread that the WHO classified it as a pandemic and no vaccination is expected until next year.  This is the first pandemic caused by a coronavirus and the WHO has never seen a pandemic which can be controlled.  Each day brings news of cancelled or indefinitely postponed events:  South by Southwest in Austin, the NBA and NHL seasons, March Madness college basketball tournaments, political rallies, and business meetings.  The whole country of Italy is on quarantine as is a town in New York.  Many colleges and universities have cancelled classes and moved to online education for this spring.  Companies have told their people to avoid travel.  Millions of children are already home as schools close and more closings are expected.  No doubt, the steps taken and which will be taken to fight the Coronavirus will be disruptive to the economy, increasing the likelihood of recession.

While China was not as transparent and open about Covid-19 as we wished, they have improved since the SARS outbreak a few years ago.  And when they got serious, they used their authoritarian tools to shut down and quarantine an area of over 31 million people, retarding the spread and giving the rest of the world more time to prepare.

Now what does all this mean for the markets?  Well, we now have the correction that most experts, including myself, felt was long overdue. Depending on which start date you use in the United States, an average bull market last between 2-3.6 years.  Our markets continue to grow since our founding, but it is a jagged hyperbolic curve pointing always in the direction of growth.  Most people, however, have a hard time internalizing this reality.  If anything, some people should maybe be rebalancing their holdings and once a bottom is reached, some should possibly look carefully for opportunities to invest in growth stocks at a much better price than a short time ago—it all comes down to your suitability and risk tolerance.  If many felt it was very safe to invest money at the highs a month ago, which was just before the crash, then it could be argued that many of those same investments are discounted now and are more attractive.  Indeed, some feel it might be very risky now to invest even though prices are much better.  In the end, it all comes down to the belief and conviction that there is a reasonable prospect for recovery which I feel will indeed happen.  In the past, recovery time usually is 18 months before a correction/bear market returns to previous highs—let us hope this happens again (although, as always, past performance never guarantees future results).  In other words, our market will most likely get back to 28,000-29,000 sooner than what people are currently thinking on average—this is the hope at least. If this happens, it probably will take a few years, but in investing time, a few years is not very long at all although for some people, it might feel like an eternity.

Besides the virus causing problems with our markets, Russia appears to be trying to damage or bankrupt American companies in the shale oil production, allowing Russia to raise prices.   That play may go on for a while. There will likely be some bankruptcies and consolidation.

In the end, the world will adjust to the coronavirus and the bust in our oil industry will end.  America will survive this and our markets will recover.  We always do.  Many people are indeed frustrated with our current political climate, but one must remember two famous phrases of our half-American Allied leader, Winston Churchill, when he said, “American Democracy is the worse form of government except for all the rest” and “America usually does the right thing after exhausting all other options.”  We will get through this time and be better for it—at least that is the American Spirit and historical trend I have studied throughout my life.  Currently, I am reading Paul Johnson’s A History of the American People and we have so much to be thankful for when looking at what type of government our forefathers have created for us and we have so much to look forward to with the type of leaders, albeit imperfect, that our country continues to produce.

Sources–Yahoo Finance, 12 March 2020
Yahoo Finance, 13 March 2020
Johnson, “History of American People.”