The financial headlines have been dominated recently not by earnings reports, trade agreements, or economic data … but by a new virus and fears of it spreading.
First and foremost, we feel for those who have contracted the coronavirus and especially for those who have died. China is the epicenter of the outbreak, and nations are doing their best to limit its spread.
We should also be encouraged by how quickly scientists are responding. The genetic sequence of the coronavirus was ready just 10 days after the first reported case. Researchers have already started working on a possible vaccine. This should give us all hope regarding the future of the coronavirus and the medical breakthroughs on the horizon.
As investors, we also can’t ignore the impact on the market. Looking at the market during previous health scares provides critical context.
Let’s go back 15 years to September 30, 2014. The CDC had just confirmed the first case of Ebola in the United States. The next day, the Dow Jones Industrial Average fell more than 250 points — or about 1.5%. Two weeks later it was down nearly 1,200 points, or 6.8%.
But by the end of that month, the Dow was back at highs … and it went on to rally as much as 16% off that mid-October low before stocks sold off in the summer of 2015.
In other words, it took investors less than a month to shake off the fears of a U.S. Ebola epidemic.
History tends to repeat itself, and I have a strong feeling we’ll see a similar quick rebound to the coronavirus that we saw to Ebola back in 2014.
The market has had a fantastic couple of months. As recently as October, the Dow was trading below 26,000. It cracked the 27,000 level a few weeks later, had rallied to 28,000 by November, and on January 10 it broke above 29,000.
That’s a 13% climb in three months. Some years, the market doesn’t see that kind of rally across the full 12-month period.
Naturally, the market was a little overextended in the short term — that was before the coronavirus started making headlines. So when the news did break, the volatility gave traders a great reason to book some nice profits.
But even after all the negative headlines that came out over the weekend — including some experts saying the spread of the disease is likely a lot worse than what’s being reported — the broad market was only down 1.5% on Monday.
Such a headline-grabbing bearish story should have led to a much, much bigger loss.
So what does this tell us? I think it shows an underlying confidence that world health officials will figure something out. And I think it also shows that the foundation beneath the stock market is as stable as ever … and even fear can’t shake the long-term bull story laid out in front of us.
Let me explain …
A History Lesson Worth Remembering
As I mentioned earlier, the coronavirus is far from the first health-related epidemic to affect the stock market.
Take a look at the table below. It shows the 12 U.S. disease outbreaks over the last 40 years and how the market reacted. Those of you who have been invested as long as (or longer than!) I have will remember that a lot of these epidemics generated an immediate negative reaction. But take a look at where the S&P 500 was six and 12 months afterward.
There are only two instances in which the S&P was lower in the months following the outbreaks. Just two! And I bet many of you have completely forgotten about some of these.
The data is similar when you look at the entire globe. According to Charles Schwab, the MSCI All Countries World Index was up an average of 0.4% in the month following an epidemic. It gained 3.1% in the six months after … and 8.5% one year later.
What makes the coronavirus slightly different is that it is centered in China — the world’s second-largest economy — during the Lunar New Year, which is a time when there is typically a lot of money spent in the country.
But the coronavirus isn’t going to affect U.S.-based stocks (with the possible exception of travel-related stocks). Most companies based in the United States will see absolutely no ramifications from the virus. And that means the selling we saw yesterday and last week was an overreaction.
We have become far too familiar with overreactions recently. The financial media publishes a negative headline and investors run for the hills without a second thought — or without taking the two minutes necessary to read the article.
Coronavirus or not, stocks do not go straight up. They never have, and they never will. But what these inevitable pullbacks provide is opportunity.
You cannot afford to be selling stocks today.
The Dow closed lower for five consecutive days, and then we saw a nice bounce today. It might be down again tomorrow … and the next day … and even the day after that. Just keep in mind that any further weakness is pushing stocks further below fair valuations.
Keep those suffering from the coronavirus in your thoughts. But please don’t let the financial media noise scare you out of stocks. The big picture remains favorable, and stocks in the trends that are changing our world remain very attractive.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.