Invest Like The Markets Will Overcome The Coronavirus, Because They Will – Forbes

Posted: February 29, 2020 at 4:45 am


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Recent financial headlines have been consumed with the coronavirus, which after originating in China has since spread to other countries rapidly, advancing into South Korea, Italy and Iran before making its way to other parts of the world, including the U.S. In all, the number of infections has topped 83,000, while the death toll is approaching 3,000, according to the most recent estimates.

Its hard to know for sure what type of long-term risk this will present to the market. Whats clear now, however, is that investors are spooked. That has prompted the worst week for equities since the financial crisis, punctuated by Thursdays nearly 1,200-point dive, which has the indexes squarely in correction territory.

Make no mistake, this will pose a serious test to many countries healthcare systems and economies. At the same time, markets are resilient, always bouncing back from big challenges, whether its the bursting of the dot-com bubble or other health crises like SARS.

This time around, the same will likely hold true. Despite this weeks carnage, U.S. markets are still up since the end of May, while the broader economy remains strong, with last months job and wage growth numbers exceeding expectations.

Of course, a global supply chain disruption that lingers for months could result in a meaningful downtick in corporate earnings. Apple, for one, has warned that the coronavirus will hamper iPhone production and sales.

A long line of other large firms have issued similar warnings, including United Airlines, Microsoft and Mastercard. Apart from Clorox, in fact, its hard to think of a company that has not been impacted negatively. By year-end, however, its reasonable to expect that supply lines and demand for goods will return to normal.

Another reason to remain somewhat optimistic is that the Federal Reserve and other central banks around the world will likely do all they can to prop up local businesses and prevent short-term consumption reductions from spiraling out of control. That means already low interest rates will go even lower, boosting the case for equities over the long term.

BUYING OPPORTUNITIES

All this presents an opportunity for investors. Airlines, theme parks, movies and cruise lines whose businesses rely on large groups of people coming in close proximity to each other are among the worst hit. (Cruise line revenues might have quite some time to wait before rising again, since travelers often have to book their tickets months in advance).

But big companies in these industries that were stable before the coronavirus outbreak will stay in operation after all the dust settles. So, for investors, this is a chance to pounce, especially when many of these firms are trading at a sizable discount.

Airlines such as Delta, theme park operators and movie producers like Disney, or even cruise ship companies such as Royal Caribbean are unlikely to suffer for long. The same is true for major, state-favored Chinese firms, such as Alibaba or Baidu.

X-FACTORS

What could go wrong with this scenario? A lot. The biggest risk is that consumption across major economies begins to evaporate, which could inflict major damage on a long line of small and mid-sized businesses, possibly causing them to fold and triggering localized recessions across the globe.

Similarly, a serious domestic coronavirus outbreak would significantly expand the timeline for downside risk. Luckily, though, the U.S. is far more prepared to contend with the fallout, not only because the element of surprise is gone, but also thanks to the quality of its medical facilities and emergency response capabilities.

Its certainly conceivable that even the gloomiest of forecasts could come true. Nevertheless, markets and hard-hit sectors will recover. They always do.

After all, major stock price slides are relatively common over the long-term, with markets averaging about three 5% pull backs per year since 1950. For more historical perspective, consider that the S&P shed 5.5% over an eight-day stretch in the wake of the SARS outbreak during March 2003. A year later, it was up more than 35%.

The markets will always face challenges. Without discounting the devastation that the coronavirus has heaped on thousands of families, this is simply the latest one and we will be all right when its over. So, its time to take advantage of this recent tumble in prices as an opportunity to get aggressive.

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Invest Like The Markets Will Overcome The Coronavirus, Because They Will - Forbes

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February 29th, 2020 at 4:45 am

Posted in Investment