The new 2019 Novel Coronavirus, also known as COVID-19, has occupied much of our thinking in recent days. And if you invest in stocks, you have a lot to worry about.
- Is the world economy going to collapse due to the broken supply chain?
- Is the global stock market facing a meltdown?
- Is this the start of the global recession?
In any crisis, there is no shortage of finger-pointing and fear-mongering. And we humans tend to jump to conclusions based on instinct. While our genes are designed in this way to protect us since the stone age, it does more harm than good when it comes to stock investing.
Does the new coronavirus impact the global economy and will it affect the stock mark? Definitely. But it is not doing it in the way most people think, instead of triggering the next stock market sell-down, it may postpone the unavoidable recession. Let me explain…
On May 27, 2009, a 22-year-old Singaporean student came back to Singapore from New York City. But she did not come back alone. She brought back a contagious virus called H1N1 which was causing a pandemic in North America. This H1N1, commonly known as the swine flu, eventually infected 60 million people in the world and killed more than 18,000 people.
Everybody remembers SARS which happened in 2003. But do you recall the swine flu epidemic (H1N1) which happened in 2009? You probably don’t.
Was it because Singapore was safer then? No!
According to Wikipedia, Singapore had more than 1,200 confirmed cases and 18 related deaths.
In fact, “It was estimated that 415,000 people in Singapore had been infected with the H1N1 virus and more than 420,000 local residents had received the H1N1 vaccine injection” as recorded in Singapore Infopedia archive. And yes, at that time,
- It was a global health emergency.
- Singapore was on DORSCON Orange Alert (just like now).
But I don’t feel the same level of panic at that time comparing to today. Do you?
Was it because of how the news was reported to us? Was it because of social media? Was it because of a more intertwined global relationship?
In fact, if you try to google H1N1 Singapore, there is not much you can find. The last H1N1 related death (18th) was not in the headline news, but it was reported by Today in a tiny corner of “Singapore Roundup”.
Human Bias amplifies in panic
Why am I telling you this?
Because many people are confused and scared today. And it is totally unnecessary.
It is the same human biases that are often taught in behavioural finance. These biases limit your ability to make rational decisions.
- Confirmation bias – the tendency where you pay close attention to information that confirms your belief and ignores information that contradicts it. For example, If you search “coronavirus death toll” every day, you will find all the “scary” numbers. But in reality, we have many more people dying from car accidents daily.
- Representativeness heuristic bias – when the similarity of events confuses your thinking regarding the probability of an outcome. You make the mistake of believing that two similar things or events are more closely correlated than they actually are. For example, if you feel unwell in the morning, the first thing that comes to your mind is, “Shit, did I get that?”
- Herd mentality bias – your tendency to follow and copy what other investors are doing. For example, when you hear on the news that the supermarket shelves are empty, the first thing you do is to join them to buy toilet paper and rice.
Very often in the aftermath, you will find your own behaviour silly. But that is what we do in a panic situation. The same thing applies to investing.
Last week, many people were panic selling their stocks. But you can’t survive a stock market crash by selling stocks. You need a better strategy.
Minority rules hurt your wallet
You may think you make your own day-to-day decisions. But you don’t.
What does it take for an idea to spread from one to many? For a minority opinion to become the majority belief? It only takes 10% of the population.
Research shows that once 10% of a population is committed to an idea, it’s inevitable that it will eventually become the prevailing opinion of the entire group. It is called “minority rules”.
Let’s think about this. During the 2009 flu pandemic in the United States, 59 million Americans contracted the H1N1 virus, 265,000 were hospitalized as a result, and 12,000 died.
- Have you heard of synchronized closure of country borders to the “mainland” Americans?
- Did you remember hearing about any massive “evacuation” from North America?
You didn’t. Neither did I.
What was the impact of H1N1 on the stock market? You can see from the graph below yourself.
I don’t want to get into politics, but in the heat of the US-China trade war, coronavirus has become weaponized and it clouds a lot of people’s judgement.
In the past few weeks, I got a few calls from worried clients. And I believe many people share the same worries.
- Should you dump all your China stocks?
- What will happen to Singapore’s stock market?
- What does it take for the markets to see a turnaround?
CNA938 just interviewed me last Thursday (Feb 4, 2020) during “Money Mind with Stanley Leong and Chew Wui Lynn” to discuss the impact on the stock market due to the coronavirus.
To hear answers to the above questions, you can listen to the recording below.
But let me share some of the key points I mentioned during the radio show.
Should you get out of stocks or is it time for bargain hunting?
Many “experts” will give you a yes or no answer. They either say it is the best time to buy, or you should stay on the sidelines and wait for a while, some says 2 months, some say 1 year, and some will tell you that it is game over.
But it is really not so straightforward. I always remind myself of this:
Every transaction has a buyer and a seller, and both of them think they are the smart one and the other person is the fool.
How true. If you think stocks can go higher, you won’t sell. And if you buy a stock, you expect it won’t go lower.
For most people, to buy or to sell is just an emotional decision because you are influenced by what you see and what you hear. What you really should consider is your financial objectives and investment strategies. For example,
- If you are a short term trader, you may want to cut your losses and look for another battle.
- If you are an income investor, you may want to buy more of the same stock since a lower price means a higher yield.
- If you invest for long term holdings, you need to examine if your assumption still holds and whether there is a fundamental change in the company’s future prospectus.
At the end of the day, you need to form your own independent opinion and not simply follow what others say.
How do epidemics usually impact the stock market?
Contrary to many people’s beliefs, the financial impact of a global epidemic is rather short-lived.
Historically, global markets are affected for about 2 to 4 months and then they start to stabilise as the number of new cases peaks and starts to decline. In the case of SARS and MERS, the local markets were the focal points of the drawdowns and it took several more weeks for local markets to recover along with the global markets.
- SARS (Severe acute respiratory syndrome) lasted 2.3 months and caused a maximum drawdown of 10.4% for the Asia ex-Japan stock market.
- MERS (Middle East respiratory coronavirus) lasted 2.2 months and caused a maximum drawdown of 9.7% for the Saudi Arabian stock market.
Rationally speaking, is a 10% loss in the stock market a big deal? Below is the impact of past diseases on the global stock market’s performance.
You need to pay attention to the x-axis which represents the time horizon. In the case of SARS, the stock market bottomed in the 7th week of the crisis. And now, since 17 Jan when the 2019 Novel Coronavirus was official, we are just into the 4th week.
How will the stock market behave this time?
Additional Reading: “Wuhan Virus: How Does It Affect Your Stock Investment Portfolio”.
How likely is it that the coronavirus will trigger a global slowdown and recession?
Global slowdowns and recessions are inevitable, with or without this virus.
It is just part and parcel of an investment cycle. The market goes from peak to trough, from recession to expansion, and the cycle repeats.
Will coronavirus trigger it? I don’t think so. In fact, I personally think this whole thing will derail the global recession. Why?
Global central banks are already struggling to fix their balance sheets. Companies have borrowed too much and have used share buybacks to sustain the stock prices. They both need an excuse to cover this up.
- Keep a low-interest rate or even cut it further? Yes, it is necessary due to the virus.
- Bad earnings, loss of profits? Yes, it is not due to mismanagement, it is due to the virus.
When the next earnings announcement season comes, the 2019 Novel Coronavirus and China will take on all the blame and become the scapegoats.
That is why I talked about the political motive in the beginning. Why is there such a synchronized global voice against China when they are more transparent, more efficient and the world is better prepared given the experiences from fighting SARS? Can other governments do better given the same circumstances?
Additional Reading: Bloomberg – China sacrifices a Province to Save the World From Coronavirus.
In my early article, I talked about how the world will not stop progressing due to “Human Adaptiveness”.
It is interesting to note that while the situation seems to be worsening every day (as reported by the news), the global stock market has shrugged off the panic and continues to rally. The US stock market even hit a new high this past week.
We cannot trust what the newspaper says, but we can trust where the money flows. – Ivan Guan
There are winners and losers in every market condition. The coronavirus is a “black swan” event, but the real damage to the world is not going to be caused by the virus itself, but rather by vicious intent from people who try to gain from it such as:
- Politicians try to gain popularity by accusing the other parties of mishandling.
- Unethical merchants who sell “coronavirus-proof” masks.
- Scammers who try to fish financial information by pretending to be from the Ministry of Health.
A majority of western-influenced nations dislike China due to political reasons. This is understandable. But if you are a rational investor, you don’t want to miss the opportunity of investing in China’s stock market. And if you have a properly diversified portfolio to start with, you have nothing to be afraid of now.
You can listen to the full record of my radio interview via the button below.
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“We cannot trust what the newspaper says, but we can trust where the money flows.”
And then manipulation happens 🙁
Very interesting article, I sent it to many people hoping the rational thinking will go viral. The panic we are seeing is clearly politically induced. Thank you!
Objective and clear – good read!
Hi, Koala, thank you for your comment. 🙂