Investing in a Difficult Environment

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Major stock market indexes across the globe fell over 10% this week.  It has been a long time since we have seen such extreme volatility.  This type of occurrence often results in undesirable emotions:  fear, anxiety, distress, perhaps even anger.  Our natural instinct is to flee danger.  When it comes to investing, these emotions and instinct work against our best interests.  During times like these, it is wise to take a step back and calmly assess the situation.

 

The major new development that ignited this sell-off is the spread of the coronavirus to Italy, Iran, and South Korea.  The hope of containment vanished with this news.  Unfortunately, it appears we have a real pandemic on our hands, and history offers limited help in analyzing the situation.  SARS was a similar virus in that it started with a transfer from animals to humans in Asia.  SARS, however, did not spread easily, and only 8,000 people were ultimately affected by it, with 10% (or 800 people) dying from it.  COVID-19, the official name of the coronavirus we’re dealing with today, has already infected ten times as many people.  Fortunately, for now anyway, it appears its death rate (3%) is significantly lower than that of SARS.

The last pandemic that spread as quickly as COVID-19 was the Spanish Flu of 1918.  Comparisons to this period are extremely difficult.  According to the Center for Disease Control (CDC), the Spanish Flu infected 500 million people, or roughly 1/3 of the world’s population at that time.  The death rate was similar to that of SARS as an estimated 50 million (or 10%) of those infected perished.  However, our understanding of science has greatly advanced since that time.  We have already sequenced the DNA of this virus and are working on vaccines, a concept that would have been completely foreign to anyone living in 1918.  Still, inventing an effective vaccine and then manufacturing enough quantities in time seems unlikely.  While we may not create a vaccine or antiviral drug fast enough to prevent the spread of the disease, we do have antibiotics now that can help prevent deaths from secondary infections.

 

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Markets do not like uncertainty, and this virus is providing large quantities of it.  Reading the CDC website to learn more about the virus provides few clues as to how this will play out.  They just don’t know what will happen.  Will the virus die off in the summer like most other viruses?  SARS ended in July with the warmer weather.  We don’t know if this virus will act the same way.  Even if it does, will it resurface in the fall as the Spanish Flu did?  Will we have a vaccine or other medicines to combat it by then?  We don’t know.  Will it spread widely in the US?  We don’t know.  How much will this affect commerce?  We don’t know.

 

Investing in such an environment is difficult to say the least.  The reality is we are always investing in an environment filled with uncertainties.  We sometimes fool ourselves into thinking otherwise, but shocks like these always lurk nearby.  The markets almost certainly will continue to be volatile until we get a better handle on this virus.  However, once there is a sense that the worst is behind us, the markets will rally.  Perhaps that happens soon.  Perhaps it will happen when the markets are 10-20% lower.  Not to sound redundant, but we just don’t know.  During this time, we will be looking for investment opportunities in companies we have found difficult to buy because of their high valuations.  Our hope is that by the end of this crisis, your portfolios will be stronger than ever.  In an effort to leave you with one positive thought: pandemics, like everything in the world, are temporary. The Spanish Flu devastated the world in 1918, yet the Roaring Twenties followed not long after.  We can get through this.

Sincerely,

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Tony DiGiovanni