Recent reports of coronavirus (COVID-19) infections spreading throughout South Korea, Iran and Italy demonstrate that successful containment of the virus has not yet been established.  Although COVID-19 has a relatively low mortality rate (2%), it is highly contagious and the long incubation period (14 days) allows carriers to unknowingly spread the disease for weeks before symptoms become evident.  The sharp selloff in equities from their all-time highs indicates that markets are now forced to face the very real prospect of a slowing global economy.  Should there be the need for more aggressive containment and quarantine actions, economic growth would be at even greater risk.

Today’s headlines are certainly stoking fear and creating uncertainty around the severity and impact of COVID-19.  However, looking back on the impact of past epidemics (e.g. Zika, Swine Flu, Avian Flu & SARS) have had on markets, we see their influence is usually relatively brief, often coincidental with other factors, and ultimately not a long-term driver of markets.  Historically, markets tend to bottom as global worries continue to rise.  For example, during the SARS outbreak of 2002-03, the S&P 500 bottomed just a day before the WHO issued a heightened global health alert and China’s market bottomed a full two months earlier, although the virus continued to spread across the globe.

The rapid spread of COVID-19 is a stark reminder that unexpected events can occur at any time, and that thoughtful portfolio diversification, with inherent risk management, remains critical.  This is especially true when the economy is in the late stages of an economic cycle, as we are now, and investors have generally become complacent.  It’s also important to keep in mind that 5-10% corrections from peak levels are very common during bull markets and are often necessary to reduce excessive optimism.

While every new development needs to be taken seriously, we currently do not anticipate that COVID-19 will usher in a global recession or a prolonged bear market for risk assets.  We will continue to monitor the situation closely, in real-time, and look for shifts in the market’s underlying fundamentals.  At present, we anticipate maintaining our current portfolio positioning and strategic outlook, which prioritizes capital preservation as part of our risk-return trade-off. .

As always, please feel free to contact us at 216-861-1148 or with any questions.

A History of Flu Epidemics and the S&P 500