Outbreak

January 29,2020

The January world equity rally has paused over the last several trading sessions. Shocking news that a virulent strain of influenza is sweeping through several Chinese cities appears to have sparked a long overdue market correction. 

US equity prices slipped nearly 2% at the beginning of trading January 27 as news that rapid spread of the Coronavirus had prompted quarantines of several Chinese cities with a combined population of nearly 60 million. Additionally, new cases in 15 countries, including the US, indicates that the virus has escaped initial containment efforts. Hong Kong equity markets dropped more than 21⁄2% when trading resumed Wednesday after the Lunar New Year break. 

There are two aspects to this situation that deserve investor attention. First, whether there is the threat of a pandemic that could affect millions. Second, the impact on businesses with supply chains in the affected Chinese regions and travel to and from China and potentially other Asian countries. 

To date, more than 6,000 cases of the virus have been confirmed in and around Wuhan, China, in the east central section of the country. The death toll stands at more than 130.1 As noted above, authorities have moved swiftly to attempt containment. 

The incubation period for the virus is currently believed to be up to two weeks, so until at least another week elapses, it will be difficult to determine the success of quarantine efforts. Chinese medical authorities assert that the rate of increase in total infections is expected to peak within the next two weeks.2 

While quarantines may isolate most exposure to China, it is difficult to predict how infected but asymptomatic individuals may affect other areas. New cases in China are still being reported at an accelerating rate so it will be some time before the global reach of the affliction is apparent.3 

In the US, persons arriving from Wuhan have become ill in four states with a total of five cases identified. The Center for Disease Control (CDC) has established an aggressive screening process for incoming flights from Wuhan and surrounding areas. In addition to the five affected individuals, so far, approximately 100 others who have or may have been in contact with them are under observation. The circle of potential infections should be expected to widen in coming days. 

1 “Coronavirus: first reported cases of foreigners infected in China,” www.scmp.com, January 29, 2020. 2 Ibid. 3 “Death Toll Climbs, and So Does the Number of Infections,” www.nytimes.com, January 29, 2020. 

©2020 VCIO Dimensions, LLC 

At this point, the chances of contracting the disease are represented to be less than that of the flu. The virus manifests as a viral pneumonia, which is far more difficult to cure than a bacterial infection. The elderly, who are especially vulnerable to pneumonia, are at greatest risk. 4 

Most medical experts have suggested that the likelihood of Americans contracting the disease is low and the CDC protocols already in place suggest that conclusion should be valid.5 A vaccine will not be available for testing for approximately three months so known methods to retard the spread of contagious diseases will be the most effective means to avoid infection. Australia, the US and Russia are actively working to develop effective testing and ultimately a vaccine.6 

Also on investors’ minds is the extent to which world commerce and travel will be disrupted. Airlines, cruise lines and supply line companies were hard hit in Monday’s global selloff. Asia is a popular destination for international leisure travelers, so fear of the disease can be expected to result in severe negative impacts for hotels and resorts across the region. 

It is impossible to determine in advance the extent of financial impact on companies most affected by this situation, but we can be certain that share prices will quickly discount worst case scenarios. Another concern is whether the Chinese government will be completely forthcoming with details about the number of cases, geographic extent of the disease, and fatality rates. 

Until the extent of infections in China and surrounding countries becomes evident, we expect global equity markets to remain volatile. Tuesday’s rebound could be the beginning of a stabilization process as investors digest information about direct and indirect risks. 

In our experience, the best advice for long term investors during periods of crisis is to stand still. Whatever the ultimate effects of the Coronavirus outbreak, carefully prepared long term plans should not be altered in response to what could be a relatively short term event. 

Attempts to reposition assets to avoid further downside price action are likely to be counterproductive. Sharp selloffs lead to equally sharp and unpredictable rallies. When one “pays” the price of owning equities by enduring a decline, it is important to remain invested to participate in the inevitable recovery. Tuesday’s rebound is a prime example. 

We cannot see into the future, so an equally possible outcome is that the selloff early this week was the culmination of not only anxiety surrounding the spread of Coronavirus, but also the extent of a normal correction after a sustained rally. Only time will tell. 

4 “Even as CDC Says Risk of Coronavirus Is Low in U.S., Worry Begins to Spread,” morningconsult.com, January 27, 2020. 5 Ibid. 6 Op.cit., www.scmp.com. 

©2020 VCIO Dimensions, LLC 

Byron Sanders

info@vciodimensions.com

vciodimensions.com/about/  (Company Website)

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