The 2019-2020 coronavirus pandemic is growing exponentially. Thousands of new cases are confirmed daily. Hundreds have died. Medical professionals and scientists are scrambling to identify how deadly the coronavirus is, how contagious, how it spreads, and what mechanisms, including vaccines, are effective at containing the outbreak.
Pandemics have an Impact on the Economy
The coronavirus pandemic also has a monetary impact. Factories in China are closed. Tourism has come to a standstill. Stock markets and commodities have sold off. While China is ground zero of the pandemic, the economic and financial impact is global because of how integral China is to the global economy.
According to Capital Economics, China comprises close to 20% of the world’s economic output as measured by GDP. Chinese exports are 14% of the world’s total while 15% of the world’s air passengers are from China. The longer Chinese factories are closed as part of efforts to contain the spread of the virus, the more global supply chains will be impacted and the greater the economic and financial toll.
The good news is while the coronavirus fatality rate—2%—is higher than the fatality rate of the common flu, the coronavirus is less lethal than other recent pandemics where fatality rates ranged from 8% to 50%.
How Stocks and Bonds Performed During Prior Pandemics
In prior pandemics, the stock market fell leading up to when the World Health Organization (“WHO”) declared a health emergency. Once a health emergency was announced, stocks bottomed and began to rise. Likewise, interest rates fell prior to when a health emergency was declared by WHO and then stabilized.
Economic growth slows during pandemics as it will during this one, but the historical pattern is once the pandemic is contained, economic growth rebounds to its prior trend line.
What Should Investors Do About the Pandemic
David Heymann of the London School of Hygiene and Tropical Medicine stated we are in the “fog of war phase” of the coronavirus pandemic. There are still many unknowns. The typical pattern is financial markets and economies settle down once there is greater clarity, but each pandemic is different so it will take weeks or even months before investors can stop fearing the worst.
In the meantime, the financial carnage has been modest to date. Global stocks, including emerging markets, have sold off less than 5%. Stock market valuations were above average prior to the pandemic and the sell-off has not been sufficiently severe for bargains to emerge. Consequently, investors should take a wait-and-see approach until there is more clarity about the pandemic rather than significantly increasing or reducing portfolio risk.
Money For the Rest of Us Podcast Episode 286 takes a closer look at how the current coronavirus pandemic compares to earlier pandemics.
Topics covered include:
- Definition of a pandemic
- The worst pandemics in the 20th and 21st centuries
- What are the factors in determining the severity of the coronavirus’ impact
- What are the economic ramifications of the coronavirus.
- How did financial markets perform during previous pandemic episodes.
- Are there portfolio changes investors should make in response to the coronavirus
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