The Investment Scientist

How Will Covid19 Pandemic Affect Your Investments?

Posted on: February 25, 2020

Predicting the market is a dangerous business, but there are enough people asking me this question that I thought I’d give it a try.

First things first, Covid19 is not a Pandemic yet.  It is primarily in China and even within China, 88% of the cases and 95% of deaths are in Hubei province which has 60mm people. The second worst-hit province is Guangdong (my hometown). There are 586 existing cases and 7 deaths there as of this writing and this goes up by one or two cases every day. Guangdong has a population of 113mm people. So my sense is that outside of the epicenter province, the situation is under control within China.

That said, the virus has spread beyond  China and infected hundreds of people in Japan, Korea, Italy, and Iran. The first three countries are unlikely to implement draconian measures limiting movements of people, the latter country does not have the medical resources to detect and fight the virus. The chances of Covid19 becoming a pandemic are increasing. So asking how that will affect your investments is a reasonable question.

The best way to answer the question is to study close historical precedents. The most recent, I believe, is the H1N1 swine flu pandemic. We have the added benefit that this virus was first detected in the U.S., which took the worst economic hit. Covid19 has barely reached the U.S. shores yet. Whatever impact it will have economically, it should be less than H1N1.

The H1N1 pandemic started in April 2009 and ended in August of 2010. According to the CDC, It infected 60mm people and killed 12,469 in the U.S. alone. My wife was one of those infected. Outside of the US, there were between 151,000 and 575,000 deaths. However, when H1N1 was first detected, the S&P 500 was 869; by the time the pandemic was declared over, the index was 1121. That’s an increase of 29%!

Does that mean we should expect a 29% increase if Covid19 also becomes a pandemic? Of course not. There is an important caveat. In 2009, the market had just touched bottom from the 2008 financial crisis and it was rebounding strongly anyway. H1N1 did not sidetrack it.

The bottom line is that predicting the future is impossible unless you are God. Why don’t we do what t is possible: have a balanced investment portfolio so that if the market gives us a 20% discount, we can take advantage of it, instead of freaking out about it.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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