Economics of Epidemics

I mentioned it in last month’s letter, but fear of the spread of Coronavirus is now gripping investors. As of today, the stock market has dropped 10% in one week as companies, economists, and individuals try to quantify what the economic impact of the virus may be around the world. So far this is a pretty standard pullback but we want to give some perspective in case it continues.

I don’t want to minimize the human tragedy of this event and certainly don’t take human suffering lightly. This is a biological and human tragedy first and an economic issue second. With that said I’d like to focus on the data of past epidemics to give us an idea of how this might affect our investments going forward.

First Trust, which is one of the fund companies we use to invest in, put out an informative piece earlier this week to show how epidemics of the past 40 years have affected the stock market. 

You can review below, but here are the main takeaways:

  •  Out of the 12 epidemics since 1980, 6 months after the epidemics the stock market was negative only once.
  • After 12 months, the stock market was negative in 2 of the cases. 
  • The average return of all epidemics in the stock market was 8.8% after 6 months and 13.6% after 12 months.

What does this tell us about Coronavirus? Every situation is different and I don’t want to read into this too much, but I think it’s safe to say this too shall pass. Will it last 6 or 12 months? I’m not sure. The bad news is still continuing as the spread is being followed around the world and possibly in our country. The stock market will likely react negatively until all the bad news is out. 

Changes to Portfolios

To be prepared for an event like this we’ve had approximately 15% cash/money market waiting to invest in most accounts. Typically we’d be ready to pull the trigger and be buying on a day like today, but we’d like to wait until more information is available before we do that. In the coming weeks, we’ll be looking to buy investments below their fair value as the emotion of fear overtakes facts and fundamentals. 

Because we never know when the market will stop going down, we typically invest at a few different times. For example, in the 2018 downturn, we invested when the S&P 500 pulled back 10% from the top and then at a 15% pullback. Those investments turned out to be great decisions. 

Below are the investments we’re interested in owning at lower prices:

Growth Stock Portfolio

  • Microsoft MSFT
  • Lowes LOW
  • Visa V
  • Adding to Boeing BA

Funds Portfolio

  • S&P 500 Index SPTM
  • Dividend Growth Fund DGRO
  • Pimco Dynamic Income Fund PDI
  • First Trust Internet Fund FDN

It’s hard to say how long it will take for these investments to be positive. Sometimes we get lucky and buy at the absolute bottom and they’re profitable quickly, but more than likely it will take some time to see the gains materialize. 

Warren Buffet was just quoted this week as saying he’s never seen a dip in the market that an investor shouldn’t have bought. We think that’s good advice and will follow it once again.

Please contact us if you have any questions or concerns! 

– Bruce Porter & Tim Porter, CFP®