Coronaviruses are a group of viruses that cause diseases in mammals, including humans, and birds. In humans, the virus causes respiratory infections which are typically mild but, in rare cases, can be lethal. [Wikipedia]
As such, it strikes fear in the hearts of millions of people and some are wondering how is this flew going to affect the markets if at all?
When answering these questions related to markets, we have to stop thinking associatively and think in probabilities. The human psychology has many biases, one of them is that our brain stores memory in associations. This means that we associate events to emotions and decide future result on similarity to same events. For example, if we get bit by a dog then the next time we see a dog our brain screams RUN! Why? The association is that dog equals bite and, in our case, deadly flu means panic and panic equals market crash.
In order to help us think in probabilities and not associatively, we need data.
Let’s look at past history to get some data ( not emotions ..)
|Year||No. of epidemic outbreaks||S&P500 Performance|
|2019||3 (Incl. Coronavirus)||
Effect on market performance
As you can see, there is no real reason for panic as there is no correlation between the number of outbreaks and market performance. This is a local storm that will blow over!
If you want to take this as a contrarian, this local downtrend will provide the trading specialists an opportunity to buy at favorable prices, as nothing had fundamentally changed in the US economy or companies operations, debt levels or the fed interest rates, growth or job numbers projections for this year.
We consider this time period as a favorable time to increase risk and properly manage it.
We absolutely do not underestimate the Corona Virus catastrophe, but in the broader market term, it has no significant impact.