Coronavirus-induced volatility your friend, not enemy

Mr. Kim is the Chief Operation Officer and Chief Compliance Officer for Kirr
Marbach & Co. LLC, an investment adviser based in Columbus IN. Please visit
www.kirrmar.com.

Our primal “fight or flight” instinct was vital for cavemen
to survive, but investors must resist their natural urge to panic when
stocks hit an inevitable rough patch. Whether caused by fears related to
last year’s inverted yield curve or the crisis du jour, the Wuhan
Coronavirus, losing your head and abandoning your plan can be deadly to
long-term returns.

In fact, savvy investors who can keep their heads while
others are losing theirs embrace short-term volatility as their friend that
allows for returns higher than the miniscule risk-free returns earned on
money markets and savings accounts. This is because timid and ill-informed
investors bail out, leaving significant opportunities for those who stick
with their plan and stay the course.

If you’re like me, you had never heard of a “coronavirus”
until the scary headlines went “viral” in recent days, leading to
apocalyptic predictions of impending doom and lower stock prices. I have
zero informational “edge” on viruses, but have been around long enough to
know fear-driven events often create meaningful buying opportunities.

I did some snooping around and here’s what I found:

* Coronaviruses are a large group of viruses that cause diseases in
mammals and birds. In humans, the virus causes respiratory infections which
are typically mild, but can be lethal. In rare cases, they are what
scientists call zoonotic, meaning they can be transmitted from animals to
humans. The name refers to the outer edge of the virus looking like the
corona surrounding the sun.
* The apparent source of the Wuhan Coronavirus (already the 6th major
viral outbreak since 2000) was a market where live animals were sold for
human consumption. There have been 2,700 confirmed cases and 82 deaths in
mainland China, not yet large by historical standards.
* The SARS (Severe Acute Respiratory Syndrome) virus was also a
coronavirus. SARS was first reported in China in November 2002 and led to
8,098 confirmed cases by July 2003 and 774 deaths.
* The H1N1 influenza (“Swine Flu”) virus was a pandemic outbreak
across the globe which lasted from 2009 to 2010 and led to an estimated
range of 151,700 to 575,400 deaths.
* The MERS (Middle East Respiratory Syndrome) virus was also a
coronavirus, with the first reported illness in Saudi Arabia in 2012. There
were at least 2,428 confirmed cases and 838 deaths.
* Ebola hemorrhagic fever is a disease caused by one of five different
Ebola viruses. The first human outbreaks occurred in 1976 in Africa, but
the biggest scare was the 2014-2016 West Africa Outbreak, which led to
11,000 deaths.
* The Zika virus is spread through mosquito bites and can cause birth
defects and other neurological defects. In 2016, Brazil estimated as many
as 1.5 million people had been infected.

It is impossible for investors to know what the eventual impact of the Wuhan
Coronavirus will be in human or economic terms. However, Sam Stovall, Chief
Investment Strategist at CFRA, found returns for the S&P 500 were positive
(some strongly so) at 30-, 60- and 90-days after the first U.S. case for the
prior five viral outbreaks. Past performance is no guarantee of future
results, but history suggests stocks will overcome the current scare, as
well.

S&P 500 Returns After Recent Virus Crises

First U.S.

30-Days

60-Days

90-Days

Virus

Case

Later

Later

Later

SARS

3/12/2003

8.0%

16.1%

22.5%

H1N1

3/25/2009

6.4%

9.0%

10.0%

MERS

5/2/2014

2.3%

4.9%

2.6%

Ebola

9/30/2014

1.1%

4.8%

6.0%

Zika

2/2/2016

4.7%

8.9%

9.4%

Wuhan

1/21/2020

?

?

?

Average

4.5%

8.7%

10.1%

It’s difficult to stick with your long-term plan when the talking heads are
screaming the sky is falling and urging you to “don’t just sit there, do
something.” Notice how they always speak in terms of points, not
percentages. “Dow Jones plunges 450 points” (January 27) is a lot scarier
than “Dow Jones falls 1.6%.”

Stock prices fluctuate wildly, but the underlying business valuations don’t.
Since 1945, declines of 3-5% have occurred every 7 months on average, with
or without viral crises. Focus on what you can control (your reaction to
volatility) and leave the rest (the sources of volatility) to the Chicken
Littles. Remember, the more often you look, the more volatility you
experience.