Pay Attention to the Corona Virus – It is an Opportunity and Risk to Your Portfolio

Unless you have been completely on your own mountain or island the last few weeks you know that a virus, call the coronavirus, is spreading within China and showing up in a lot of other countries such as the United States.  The virus causes pneumonia and, in some cases, can cause death for people already in poor health.  China has already limited travel for millions of its citizens to try to stop the spread of the virus.  This is unprecedented. 

On Friday, January 24, 2020, over 900 people had been confirmed to be infected and over 26 deaths had resulted from the virus. 

One week later, on January 31, 2020:

• Nearly 10,000 people have been confirmed to be infected and over 200 deaths have resulted from the virus.  China is monitoring another 100,000 individuals with possible symptoms.  For context, this means the total number of infections and deaths related to the coronavirus have already exceeded the total number of infections and deaths from the SARS outbreak in 2003.
• The World Health Organization has final declared the virus a public emergency of international concern. 
• Three of the world’s biggest airlines have suspended all flights to China until end of March 2020.
• The U.S. Centers for Disease Control said the virus is spreading rapidly in China and aggressive measures are needed to stop it from taking hold in the United States.  Earlier in the week, the U.S. evacuated over 200 citizens from China but has quarantined them until they are determined to be free of the infection.  Just before publishing this post, the U.S. declared they would be implementing (i) travel restrictions for non-U.S. citizens that have travelled to China within the past fourteen days and (ii) quarantine procedures for U.S. citizens that had travelled to China recently and were seeking to get back to the U.S.

Stock Market Impact

Rapidly expanding outbreaks can cause panic, cause travel and certain types of commerce to come to a halt, and result in things like stock market sell-offs.  

Regarding the economy, some investment banks (e.g., Goldman Sachs) are expecting the coronavirus to impact the U.S. economy in the first quarter of 2020 and slow the growth of the Chinese economy for at least the first the first six months of 2020.  

Regarding the U.S. stock market, the markets have had a volatile January.  Before the coronavirus, it looked like January would be another good month for the stock market but the S&P 500 and Dow Jones Industrial Average have taken a hit.  These major indices are down in January after a strong start to the beginning of the month.  On Friday, the Dow Jones was down over 603 points, or 2.1%, the S&P 500 was down 58 points, or 1.8%, and the Nasdaq was down 148 points, or 1.6%.

If the virus continues to spread in China and outside of China then the U.S. stock market, which recently was at all-time highs, may additional drops over the next few weeks.

Some sectors are being hit the hardest

Oil and gas, travel, base metals (e.g., think steel and copper but not gold and silver), casino, and cruise companies are getting hammered from the coronavirus headlines. 

The coronavirus is materially affecting the travel between China and other countries.  For example, some experts are estimating a 75% drop in passenger traffic between the United States and China and similar drops are happening between China and other countries.  Major airlines are suspending all of their flights to China which is unprecedented.  Companies like American Airlines are down almost 7% for the month.

Regarding luxury activities like gambling and cruises, gaming corporations are reporting that their Chinese operations are seeing customer visits drop by as much as 80% in the Macau casinos in China.  As an example of the short-term impact on some gaming companies, Las Vegas Sands receives over 60% of its revenues from its Macau China operations.   Cruise operators, like Royal Caribbean, are cancelling cruises from China and every lost cruise is estimated to be a $3-$4 million impact on their revenues.  Stocks like Royal Caribbean are down almost 10% for the month. 

Oil prices have dropped by more than 12% in January as the coronavirus intensifies.  The thought is that the virus will significantly dampen the demand for oil from China, the world’s second largest economy.  In fact, China contributes to more than 25% of the global oil demand so the bigger the impact on China’s economy the bigger the impact on oil demand, oil prices, and oil company stocks.   Companies like Exxon Mobil are down over 10% for the month.

Is it Buying Opportunity for Stocks or is it Time to Lock-In Those Gains?

Investors could be overreacting right now or it could be just the beginning of a larger drop in the markets if the virus continues to spread in numbers and geography.   I am personally not buying any of these depressed stocks right now for fear of catching the proverbial falling knife.  However, past contagious disease breakouts (think Ebola and SARS) have been contained and therefore the economic impact from the coronavirus should be short-lived.  In addition, the public tends to overreact to these outbreaks until they eventually move on to something else.  For those reasons, the dips in the stock market due to the virus are likely to be short-lived.

I recommend doing the following:

1. Look for Big Changes in the Numbers Infected and Dead in China and, More Importantly, Outside of China:  If the infection and numbers of deaths slow down over the next few weeks then the markets might actually breathe a sigh of relief and see a sharp uptick.  However, growing numbers of infections and deaths could cause the broader market to suffer a significant correction.  If the broader market sees a 10% or broader correction you may want to consider buying some stocks or index funds you like.
2. Add some Gold as a Hedge to Volatility:  A major Gold ETF (GLD) is up almost 5% for the month.  Historically negative stock volatility for stocks has been a positive for gold.  As I mentioned a previous post, I bought gold earlier this month due to the uncertainty of the impact of the coronavirus.  If you do not have any hedge to the volatility you might want to add some gold to your portfolio in case this virus takes longer to contain or spreads well beyond current expectations.
3. Monitor the Stocks You Like in these Hard Hit Industries and Be Ready to Act if there is a Buying Opportunity:  At some point the virus will be contained and many of these stocks will rebound.  Create a list of stocks that you like that are being hit hard and keep watching them along with the news about the coronavirus.  If you see a further drop in the stock price of a company you have wanted to own then that may be a time to pick up some shares and wait for the rebound.