In this episode of The Smart Money Show Stephen Rischall, CFP® and Neal Frankle, CFP® discuss how the recent COVID-19 coronavirus outbreak is similar to other major health events and market shocks we’ve seen in the past.

STEPHEN: If you want to know more about how the coronavirus is affecting the global economy and your investment portfolio then your going to want to watch the rest of this video. I’m your host Stephen Rischall, along with my co-host Neal Frankle, and this is the Smart Money Show.

Welcome back and thanks for tuning in to another episode of the Smart Money Show. Today we’re talking about all things coronavirus and the impact that it’s having on the global economy.

To put things in perspective last year alone during the flu season in the U.S. alone there were over 35 million cases of common influenza’s. Over 500,000 of those folks were hospitalized and there were over 34,000 deaths, that’s right from the common flu just right here in the US. Worldwide that number was more like 500,000, that’s how many people die worldwide, even today, just from the common flu.

Now it’s not surprising that most of those people are older, over the age of 60, and many of these folks also have compromised immune systems. Those are the folks that have the highest mortality rate for the common flu, and so far this coronavirus isn’t much different. Worldwide there’s been over 86,000 cases of COVID-19, as they’re calling this coronavirus, in almost half of these cases they’ve already made a full recovery. Now there has been about 2,900 deaths so far and we just experienced our first death here in the U.S. from COVID-19, but the vast majority of these deaths are people over the age of 60 and those that already have compromised immune systems.

Yes this thing is contagious and it is spreading to more countries. Just the other day the governor of California said that we’re monitoring about 8,000 people here in the state that may have come into contact with the virus, we just don’t know yet.

You know what else happened Neal, last week the stock market experience a technical correction. That means that many US and International stocks, their value is now at least 10% lower than the highs that it reached. The S&P 500 hit its most recent peak on February 19th.

So Neal, let me ask you, you’ve been around a bit longer than I have, have we ever seen anything like this before in the stock market?

NEAL: Well as someone who is 62 years old this is something that’s near and dear to my heart because I’m in that target population, but with respect to the stock market, yeah we’ve seen corrections like this before, it’s not fun, but unfortunately it’s a normal part of investing and to be expected.

Now the coronavirus is more contagious than the normal flu and it also looks like it’s more deadly, more fatal, but we’ve seen situations in the past, with health scares, that have impacted the stock market.

In 1981, this was I think before you were born, I’m not sure. HIV and AIDS became an issue that we became suddenly aware of and the S&P 500 dropped 18%, but for the full year in 1981, the market was down 9.7%.

In 2003 we had the SARS virus, which is a type of coronavirus, and by the way is far more fatal than the coronavirus that we’re dealing with now, as soon as it hit the screen the S&P 500 dropped 14%, but interestingly for the full year in 2003 the market actually ended up 26%, and what’s fascinating to me about that is that comes on the heels of you know in the early 2000’s, from 2000, 2001 to 2002, the market crashed about 50%, because of the dot-com bust. But you’d think that as a result of SARS coming online right on the heels of that, the market would just fall apart, but the market actually ended up.

In 2014 EBOLA tanked the market 8% on the outset, but for the year 2014 the market was up 11%. Now what’s fascinating is that if you look historically over the last 50 years, there have been 13 pandemics, and there has just not been a huge long-term impact on the stock market, after the initial scare.

But there have been other notable events as well. You might remember in 2011 we had the United States credit worthiness downgraded. As soon as that event happened, the S&P dropped 19% which is huge, that’s scary, within two weeks the market dropped almost 20% but by the end of the year the market ended flat.

Then more recently in 2018, the last quarter of 2018, the U.S. China trade war heated up in that last quarter of 2018, the market dropped again 19%. For the year the market was down 14%, but then for 2019, the year after, the market did very well.

STEPHEN: That’s right, so it sounds like this isn’t anything new, I mean this type of coronavirus COVID-19 that’s new, but we’ve seen things like this before in the stock market.

Here is what the S&P 500 looks like so far this year, like we said before it’s down about 14% off of its high reached on February 19th, but so far year to date, the S&P 500 is down about 8.5%, not the greatest it doesn’t feel good.

But Neal, why do you think the market’s behaving this way?

NEAL: Well primarily because people are scared out of their minds, we don’t have reliable information coming out of China, and we don’t have enough data yet from other countries, the market and investors hate uncertainty and that’s a huge driver of what we’re seeing. As we’ve seen in the past, that’s the common thread through all these other crisis events, both health related or finance related.

We are seeing some real problems, China has been on lock down, literally for the past couple of months, and that’s disrupting the global supply chain, a lot of things, products are still manufactured or least assembled in China. Consumer electronics, apparel, components that get shipped all across the globe to manufacture other products, those things have been halted or curtailed. That’s going to have a negative impact on the ability of those companies.

The consumption and travel sectors are also taking a huge hit, and not just in China, conferences are being postponed and cancelled, the Mobile World Congress in Barcelona was cancelled, and there are talks of the Tokyo Olympics possibly being canceled. The last time that happened was World War II. So people just aren’t going out as much and they’re avoiding large crowds.

STEPHEN: Right, and we’ve heard from some of our clients, I was on the phone the other day with one of my clients and he was just telling me that he had to cancel his cruise, he was really excited, he was going to go on this cruise, a the river cruise in Europe, but I mean who wants to go on a cruise right now, that’s a little bit scary.

But it’s not it’s not changing everybody’s plans, I was talking to another client and him and his wife just got back from Thailand, they were there for about three weeks, they still had a great time, they said yeah it was pretty quiet over there, and they had quite a bit of private dining, but ultimately people are still out and about, it’s not bring the whole world to a screeching halt.

That also means not every sector and every stock is dropping either. There’s actually companies out there that are benefiting, at least to some degree, from the coronavirus right you have more people using social media, you have a lot of folks working virtually, hosting virtual meetings. There’s a lot of technologies that help businesses do things like electronic signatures, we use some of that, and what about streaming movies and TV shows . There’s a lot more people at home that are doing those kinds of things, so some of these companies are actually doing all right.

What do you think Neal, we have to probably temper our expectations for grow through the rest of the year, what’s your opinion on hat?

NEAL: It’s a really good question, you know the earnings outlook for the rest of the year has been reduced. Certainly for the 1st quarter there’s broad agreement that the earnings for the S&P and for Global large companies is going to be significantly reduced. Now there’s a lot of difference of opinion on what are earnings are going to look like thereafter. If someone says to you they know what’s going to happen to earnings for the year, or for the next 3 months, 6 months, 9 months or whatever, they’re kidding themselves and they’re trying to kid you. There is broad disagreement on what happens going forward.

Keep in mind, historically speaking once the number of new cases starts to level off or decline, economic activity starts to heat up and historically, this is no guarantee of the future, but historically the stock market rebounds really quickly.

So we’re seeing a lot of different emotions in the stock market and that’s a big driver of what you’ve seen in the last week. Look, the coronavirus is real, but we’ve got to put it in perspective, investing is long term, it’s not just a 1-week, or 1-month, or even a 1-year event. You’ve got to think long term. Big moves like this can be very scary, it hurts it can be frightening, but we’ve got to keep the big picture in mind. Don’t forget that last year the S&P 500 was up 28%, and if you look at the markets over the past 10-years, from February 2010 to now, the market is way up.

Even despite all the horrible things that look like they were going to tank the market and the economy, and was going to disrupt and never recover, the economy has always been very resilient. Historically over the last 20, 30, and 40 years, with all the ups and downs, the good and the bad, the S&P 500 has averaged about 9% per year

STEPHEN: That’s a good point Neal, long-term this could yield some opportunities like diversifying supply chain more across the globe into new areas that haven’t even developed, like emerging economies. There’s also the possibility of interest rates going lower, there’s been a lot of talk among Central Bankers and governments around the world might come in and stimulate the economy a little bit.

NEAL: Since we know that things are bad right now and they’re going to get better, or we hope they’re going to get better, why don’t we just go to the sidelines now and sell everything, go to cash and just buy back in when things are looking better?

STEPHEN: I guess if you have a really good crystal ball or fortune teller, let me know by the way because mine doesn’t work, but seriously right, I mean market timing is a fool’s game. No one has been able to ever do that successfully over the long-term. A broken clock is right twice a day. So you might get it right here and there but you’ve got to put your emotions to the side, you can’t take drastic measures in times like this, either buying or selling.

It doesn’t mean you should just buy the dip right now either. If you’ve had cash on the sidelines for a while, then maybe yes this is a better entry point to start investing in the stock market, but you’d probably be better served by dollar cost averaging, this idea of consistently putting in little by little over the long-term. Bottom line I wouldn’t suggest piling into stocks right now, nor would I suggest selling everything and going away for a while.

Maybe the stock market will go down a little bit more, nobody really knows, but there’s other room important things going on right now. We’ve got the Democratic primaries as well as an election year right here in the U.S. It was just announced the other day that the Taliban along with the U.S. have a peace deal, so it sounds like U.S. troops are possibly leaving Afghanistan in the near-term. Look over time the stock market probably will go back up.

Keep this in mind, here at Navalign your portfolios are diversified, for example, Neal you wouldn’t want to have all your money invested in China right now would you? So look it’s impossible to predict a health emergency, especially anything of this magnitude, and diversification alone isn’t going to immunize your portfolio from these types of situations, but it does help. While the past is no guarantee of future results, there have been countless health emergencies just like this in the past, wars, economic trouble, and other things that us humans have brought about on ourselves. Yet despite all that, the economy survived and expanded, and time and time again we have prevailed.

Look it could be really foolish to make investment decisions based on the outside chance that this coronavirus tanks the whole global economy. Could things get worse? Sure they could, but when you think about the fundamentals of the global economy, this is really event-driven, what we’re seeing right now, this is what we’ve been talking about. This is not fiscal mismanagement, this is not geopolitical tensions, we’re not at war, right.

Bottom line this health event, it’s being managed really well, at least as well as it can be. There’s a serious global response, it’s all over the media, everybody knows about it. There’s a worldwide effort to develop a vaccine and there’s a lot of money, time and energy being spent managing this situation. Personally I think that’s actually a positive thing, to see us all coming together for the common good of humanity.

If you have questions about your portfolio or your finances, call us at the office, send us an email, and let’s set up a time to meet. Also, if you learned something new in this episode of the Smart Money Show, share it with your friends, share it with your family members, because they probably have the same questions and concerns that you do.

Until next time I’m Stephen Rischall.

NEAL: And I’m Neal Frankle.

STEPHEN: And we’re helping you.

NEAL: Get smart with your money.