Sanity In An Insane World

Frederick C. Taylor

March 11, 2020

As is often the case when an occurrence takes place that lights the fuse of a market/economic decline, a great deal of irrational behavior comes to light – that which both precedes the event (see Buffet’s famous quote: “when the tide goes out you find out who’s swimming naked!”) as well as during and even beyond. More often than not, those who claim to be disciplined investors who have gotten the “religion” of passive, diversified investing almost immediately turn into “active” investors as they blow off their portfolios and supposed discipline and rush to the exits along with the rest of the lemmings.

There’s nothing new here and nothing we haven’t seen before and this is one of the reasons we say it is “investor performance” more than “investment performance” that counts in the long run. In other words, your behavioral response to markets and investment conditions count more than any single factor in determining the successful or unsuccessful outcome to your long-term / lifelong investment experience. I recognize the difficulty for investors, with the media and many politicians fanning the flames of incipient panic – forget any responsibility, if there are votes and ratings to get for acting irresponsibly.

One of the most important items to assist investors to remain calm and rational while irrational behavior is occurring all around them is to have an historical perspective and in order to gain that, one has to have some knowledge of history and what has occurred previously in similar times. Thus, the following is provided to provide some perspective which should enable you to remain disciplined and this discipline has always inured to the long-term benefit of successful investors (the “current” information is as of 3/5/2020).

Overview of the Coronavirus Outbreak

Cases in Mainland China: 80,430 (per Chinese reporting?)

Cases in other countries: 17,631

The virus has spread to 88 countries around the world

As of 3/5, in the U.S. there were 160 confirmed cases in 17 states with 11 reported related deaths (this number obviously has grown and will continue to grow as testing takes place)

The total active cases stood (on 3/5) at 40,575, a drop of about 36% from the peak on 2/17.

Previous Outbreak Comparisons

In 2002, SARS had 8,098 confirmed cases and 774 deaths, a mortality rate of about 10%

In 2012, MERS had 2,494 confirmed cases and 858 deaths, a mortality rate of 34%

Coronavirus has infected over 98,000 people, the death toll has risen to 3,350 (as of 3/5); a mortality rate of 3.4% (a percentage rate which will drop as more are tested and diagnosed)

This virus appears to be more contagious but less fatal than SARS and MERS

For every 50 people infected with MERS, 17 died

For every 50 people infected with SARS, 5 died

For every 50 people infected with the coronavirus, 1 died

Economic Fundamentals

I will spare readers the long list of statistical references and simply summarize by saying the fundamentals underlying the U.S. economy are still relatively strong – particularly in light of previous market downturns in 2000 – 2002 and 2007 – 2008. The consumer is still showing confidence, the housing market is strong and the labor market, as recently reported is on very solid footing – so far.

No question that valuations of U.S. stocks were pretty high and this correction (so far) has brought U.S. equities down to more “reasonable” historic levels – albeit not quite to their historic average. Similarly, declines in global equity indexes and emerging market ones have also brought valuations down closer to their historic averages. Cheap? No! More reasonable? Yes.

History and Market Performance

Historically, markets’ reaction to prior epidemics and quickly spreading disease pathogens has often been short lived. Below, outbreaks and subsequent market performance:

Epidemic Mo End 6 Mo % Chg S&P 12 Mo % Chg S&

HIV/AIDS 6/1981 -0.3 -16.5

Pneumonic Pl 9/1994 8.2 26.3

SARS 4/2003 14.59 20.76

Avian Flu 6/2006 11.66 18.36

Dengue Fever 6.36 6.36 14.29

Swine Flu 4/2009 18.72 35.96

Cholera 11/2010 13.95 5.63

MERS 5/2013 10.74 17.96

Ebola 3/2014 5.34 10.44

Measles/Rub 12/2014 0.20 -0.73

Zika 1/2016 12.03 17.45

Note: Keep in mind with respect to the above, past performance is no guarantee of future performance!

Now I grant there is one current additional factor influencing markets currently and that is the over-production of oil due to the dispute between Russia and Saudi Arabia. More than likely this is due to the Russians attempting to exacerbate the economic impact upon the U.S. and it’s economy and both they and the Saudi’s attempt to severely impact the fracking portion of the energy industry in the U.S. Ultimately, this will seriously hurt both countries as more money has been lost attempting to bet against the U.S. than just about any international game that can be played. However, in the short-term, there will be some economic impact.

History also teaches us that 2/3 of the time the market moves in an upward trend and 1/3 down. After eleven years (keep in mind the mood and reaction of most investors on March 9, 2009 – the bottom of the last bear market – did it seem like it would ever end?) the 1/3 and then some was long overdue to occur. These downturns and volatility they bring with them are the price that investors have to pay for the long-term returns the equity markets deliver. Equities, like all investments have risk attached to them. The returns investors receive are the compensation they are paid for the assumption of their risk. Risk means you may not always receive what you expect – with equities, at least in the short-term!

Frederick C. Taylor