The Impact of Coronavirus

April 7, 2020

The impact of the Coronavirus is a painful reminder of how quickly the landscape can change: A virus that started in a province in China is now in 114 countries, with 125,000 cases worldwide, and 4,600 people have died. The majority of those deaths have been in China, where air quality is poor and close to 90% smoke cigarettes. Within three weeks of identifying the virus, the United States has 1376 confirmed cases and 36 deaths. According to public health officials, it is popping up in atypical places – sometimes with no epidemiological or logical link to the original outbreak in China. Mild (or absent) symptoms in some people means that this virus is all but impossible to stop.

As most of you know, my team and I have been through many bear markets, and while the catalyst is always different, we know what to do while it is happening. I believe that providing you with updates, insights and perspective in all economic and market environments is critical to the standard of care at Key Financial. I am going to give it to you straight: this is not going to be easy. Equally, or perhaps more importantly, we are doubling down to protect you from the ravages of the market response. These actions are core to our mission, and the events of the past three weeks makes this even more critical.

We are at an inflection point. Containment methods such as quarantines, limiting large gatherings, and avoiding unnecessary travel are steps that China has shown can reduce the spread. Mitigation includes washing hands, avoiding physical contact, and social distancing (an arm and a half away).

Scientists report that the cellular makeup of this virus is very similar (85%) to SARs. A vaccine was developed for SARS but by the time it came out, it was not needed. I do not know a thing about making a vaccine, but the report suggested this could accelerate the discovery. While it can be spread through surface contact, it has a fragile shell and is not stable. Disinfectants can work. That’s good news.

The bad news comes from Dr Anthony Fauci, the Director of the National Institute of Allergy and Infectious Disease. He announced that this virus is 10 times more lethal than the seasonal flu. According to CNN, there are 34 million cases of seasonal flu with 20,000 deaths this season alone. Ten times is pretty significant. Until we get testing kits out to health facilities and labs, we really aren’t going to get relevant data. This crisis is only two months old, and credible data is sparse.

Despite a nice recovery in the market on Tuesday, it now appears that the investment markets are in full panic mode. The World Health Organization has declared the Covid-19 virus to be a global pandemic. Traders on Wall Street are selling at virtually any price, which is causing the markets to drop deeper into bear market territory. Trading was halted again this morning, and the Dow is down another 8%. (10:04 am on 3/12/2020).

It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits. This particular stampede can fairly be described as one of the worst in market history. Michael Batnick, director of research at NYC investment manager Ritholtz Wealth Management, noted this is the fastest bear market ever. That is, the fastest that the U.S. stock market has experienced a decline of 20% or more going back to 1915. The average number of days from peak to a 20% decline is 255, and the median is 156. The recent market selloff reached this dubious achievement in just 17 trading sessions.

The long bull run that started in March 2009 and set many records along the way, is now officially over. We thank the market for the businesses it helped to grow, the dividends it shared, and the wealth it has created for so many Americans over the past 12 years. The markets have effectively erased the gains from 2019 with the S&P, trading at about where it ended in 2018. Fear is dominating the markets and is building on itself. None of us know when the bleeding will stop.

What I do believe is that it will stop, and I think it will do so sooner rather than later.

Once health precautions are taken, it is appropriate to address the potential for losses, and how best to navigate the market conditions. It is clearly disrupting economies on a worldwide basis, and consumers are pulling back. Companies are changing the way they do their work, and employees are being encouraged – and in some cases mandated – to work from home. There are concerns about corporate earnings and liquidity. Some companies and even industries such as cruise lines are at risk. President Trump spoke last night proposing a payroll tax cut, and bailouts of key publicly traded companies in the travel and entertainment industry. The Federal Reserve Board has cut a key interest rate by half a percent – and is providing liquidity for the credit markets. President Trump knows that his re-election is dependent on a fiscal response to the crisis and mitigating the damage a recession can cause.

Research analysts at Goldman Sachs took a look back at the three types of bear markets:

Structural Bear Markets – Threats to our banking systems such as the one that occurred in 2008
Cyclical Bear Markets – Recessions from the business cycle
Event-Driven Bear Markets – Completely unexpected

Of the three, structural bear markets tend to be deeper and pose the greatest threat to our financial system and economy. Cyclical bear markets typically occur due to an economic recession, while the third type of bear market is triggered by events such as war, oil price shocks or an emerging-market crisis. They found that the average event-driven bear market resulted in a 29% decline. The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.

There is some good news for many investment portfolios: The 10-year Treasury yield experienced its biggest weekly drop since December 2008, and bonds have provided a critical buffer for diversified portfolios. While we do not expect large gains from fixed income, they provide far fewer volatile swings and give us a viable option for clients needing distributions from their portfolio.

In fact, if we are to panic about anything, maybe it should be to rush to refinance a mortgage. We haven’t seen the 10 Year Treasury Rates we’ve seen this week – ever. Who would have thought we would breathe a sigh of relief to see the 10-year Treasury Yield closing at .72% yesterday? On Monday, it was at .31%.

The harder conversation is about market timing. Most people understand that it is impossible to time the market without a crystal ball. This is easily forgotten when the daily headlines announce that your net worth is falling by 4 – 7% in a single day, and when the stock portion of your portfolio has fallen by 25% in record time. The natural question is: should I get out now and avoid more of the same?

There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish. The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn – which may come tomorrow, next week, next month, or next year.

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health. The danger is not in the drop itself; the real danger is in selling at the bottom and then missing out on the recovery.

One last thing: As we read the headlines and listen to the news reports about the Coronavirus, please remember this:

Most Americans will not get it.
Of those that do, 99% percent will recover.
80% of those that get the flu may not even realize they have it or have very mild symptoms.
Gilead has a drug called Remdesivir that was created to treat Ebola. It is being tested for possible use for patients with the Coronavirus. A report that aired last night on Fox News indicated that it is “helping”.
We have the finest health system in the world.

It is more important than ever that we remain as available as possible for you. I also need to be a responsible CEO and take care of the people who take care of you. I believe face-to-face meetings provide valuable context and perspective, yet we have a significant number of clients over the age of 60. Therefore, I think the responsible action is to encourage that meetings be conducted over the phone. We are taking this day-to-day, week-to-week, and we will reach you by phone or email if you have a meeting scheduled over the next week. While employees at Key Financial are healthy and coming into work, we are also prepared to have our staff work from home. We are so lucky to have such a deep bench who are working so diligently behind the scenes. I am honored that they chose to work for you and me, and grateful for their willingness to be “on-call” day and night.

Collectively, our commitment to you is greater than ever.

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