Market volatility and economic uncertainty have increased due to the further spread of the coronavirus (COVID-19) outside of China. Could this be the end of civilization as we know it?
The answer to that question is NO. Absolutely not. The fact of the matter is that this latest virus outbreak of COVID-19 was anticipated by no one and it broadsided everyone. It has created a “crowd psychology” effect which helps to explain why markets have performed so erratically in recent weeks.
The nine major epidemics since 1983 are SARS, Avian Flu, Dengue Fever, Swine Flu, Cholera outbreak, MERS, Ebola, Zika and again Ebola. Reviewing this period, markets and/or economies have always recovered very quickly. In the nine cases mentioned above, the S&P500 had an average price recovery of 16.3% within 6 months of the lowest point of the epidemic crisis.
It is too early to estimate the full economic impact of the coronavirus, but there are reasons investors shouldn’t panic. First, we are seeing much more of a global coordinated effort this time in terms of dealing with the outbreak. Second, the mortality rate is still far below, at about 3% (reports vary) compared to 10% for SARS and over 50% for Ebola. Last and most importantly, epidemics typically don’t have a prolonged market impact, as shown in the chart below.
We can however make the following conclusion from these past virus outbreaks, and they are:
- The world is not ending
- Recoveries from past market scares were rapid
- Opportunities will again present themselves
China seems set to absorb most of the economic impact from the coronavirus, followed by the Asia region, but virus-related disruptions also will likely slow global growth. Eric Lascelles, RBC Global Asset Management Inc. chief economist, cut his 2020 global GDP forecast to 2.9% from 3.3% due to coronavirus risks.
Due this particular coronavirus correction, there will have been much pent-up demand that will have accumulated due to shutdowns and disrupted production supply chains, and economies will go into catch-up mode.
As long as the virus can be contained in the weeks ahead, we would expect the short-term hit to global growth and, by extension, the corporate earnings outlook, to be acute but ultimately transitory. RBC’s large investment advisory team remains vigilant in monitoring the evolution of the data related to the COVID-19 outbreak and its potential impact to the global economy.
From a long-term perspective, it’s important to recognize that virtually every year comes with its own set of economic, financial or political events that give investors a reason to remain on the sidelines. The bottom line is, no one will benefit from selling their investments in a panic or during a correction. It may be scary while you’re in the middle of it, but history demonstrates (again, and again, and again) that global disease outbreaks have very little effect on the market, certainly over the medium to long term.
The appropriate course of action for investors is to stick to the plan, maintain a well-diversified portfolio, containing high quality investments, and look to decades of (positive) market history for comfort.
If you would like the RBC Wealth Management detailed reports on Coronavirus and its impacts on capital markets and the economy, then please let me know.
Best regards,
Najia
Najia Crawford, Hons. B.A. (Econ.)
Investment Advisor | Conseillère en Placement
RBC Wealth Management | RBC Gestion de Patrimoine
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Avril McAmmond | Administrative Assistant | T: 905-469-2850 | avril.mcammond@rbc.com
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