Sooner or later we were bound to have a nasty correction. I wasn’t sure what the catalyst would be, but I knew it was coming. We discussed, in subsequent posts, how I thought it might have to do with politics. Instead, a novel virus with origins in Wuhan, China has spread across the world. Thankfully, China now appears to have the situation under control, with the number of new cases continuing to fall. However, there are now an exponential number of new cases in countries like Italy, South Korea, and Iran. The number of cases is around 100,000 globally at the time of this writing. This has sent global financial markets plummeting. But with a mortality rate of 3.4% or less; what are the real reasons this virus is so dangerous.
The mortality rate might seem low. On the other hand, when put into context, the seasonal flu carries a 1.1% mortality rate in the U.S. If Covid-19 caries a 3.4% death rate, then this virus is more than 3x as deadly as what we’re used to. Perhaps more concerning, health officials have nothing to fight this other than containment. At the time of this writing, there are no therapies, medications, or vaccinations to treat/cure Covid-19. It seems to be most lethal in those over the age of 50 with prior health conditions. But wait, even if this virus infects every person on Earth, isn’t that only 3.4% of the population? Does this really translate to a 10-20% reduction in corporate earnings?
The real dangers of this virus are psychological in nature. Companies and employees get scared of this so-called new virus. Parts of the world begin shutting down, people stop going to work, and supply chains become disrupted. We saw this in China with Apple shutting down production and Starbucks closing most of its China stores. In addition, demand for commodities falls and certain industries literally grind to a halt. Cruise ships, air liners, and other travel related companies basically cease to function for a time. And finally, consumer confidence falls as fear grips the rest of the world. People stop going out, spending money, and basically hunker down at home.
For me personally, I was down nearly $17,000 from my peak in early February. After another volatile week of 1,000+ point swings, I made back about $4,000 by Friday. So far, this correction has shaved off about $12-13k in value. Much of this came from tech, energy, and consumer discretionary stocks. I believe the key is keeping an eye on the ball. This virus is being contained and eventually there will be a vaccine. It’s a serious problem but a temporary one. Therefore, I’ve been using the opportunity to buy small amounts almost daily. I added on to Disney, 3M, Cracker Barrell, and Honeywell over the past 2 weeks. And if the market falls next week, I’ll buy more! These events are scary, but they give us once-in-a-decade opportunities for some serious value.
DISCLAIMER: I am long on CBRL, DIS, HON, and MMM. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.