As I write Friday morning, the S&P has fallen 15% over the last two weeks, which means it’s down 11% in 2020. In times like this, it’s important to remember that we’ve gone through — and emerged from — equally frightening stretches in the market. To help us with this perspective, and to remind us why panicked-selling is the last thing we should do, today we’re turning to our resident macro expert, Eric Fry, editor of Fry’s Investment Report. In Eric’s update to subscribers earlier this week, he addressed fears surrounding the coronavirus and spoke to how we should view it as investors. If this volatility has you spooked, don’t miss this issue. Jeff Remsburg

 

The Stock Market Catches a Virus … but It Will Recover

By Eric Fry

The coronavirus epidemic has become a worldwide human tragedy, but it is unlikely to become a worldwide economic tragedy.

Certainly, the epidemic is a frightening event that is causing widespread suffering and anxiety. The deadly virus has infected more than 80,000 people so far and claimed more than 2,600 lives … and the tally grows by the day.

The virus has also sickened stock markets worldwide — causing more than $4 trillion of global stock market wealth to perish.

But if past is prologue, the swooning global stock markets will recover their health fairly soon and resume moving higher.

The SARS epidemic of 2003 triggered a global stock market selloff. But that downturn didn’t develop into a worldwide bear market. Quite the contrary. The selloff produced a buying opportunity that would reward investors handsomely over the following four years.

This week’s epidemic-triggered stock market drop is not identical to the downturn of 2003, but it could provide a similarly rewarding buying opportunity.

The only good news about the coronavirus epidemic is that it appears to be less lethal than SARS (severe acute respiratory syndrome) virus. The coronavirus kills about 3 out of every 100 people it infects, whereas the SARS epidemic of 2003 killed nearly 10 out of every 100 infected people.

Furthermore, the official infection rate may be much lower than the actual one, because it includes only “confirmed” infections. Therefore, if we assume the actual infection rate is higher than the official one, the actual fatality rate is even lower than 3.2%.

This one tiny shred of “good” news leads me to believe that global stock markets will stabilize fairly soon and resume moving higher … just like they did during the SARS epidemic 17 years ago.

In February of 2003, China notified the World Health Organization (WHO) about its baffling new SARS outbreak. Over the next four months, the epidemic would infect more than 8,000 people in 29 countries, causing 774 deaths.

But interestingly, most major stock markets bottomed that March, just a few weeks after the SARS epidemic became a Time magazine cover story.

 

 

Those March 2003 lows proved to have been great buying opportunities, as most global markets moved significantly higher over the following months. China’s Shanghai Composite Index did not bottom out until November of 2003, but it made a spritely recovery as well.

 

 

As the above chart shows, all the major stock markets were much higher on February 10, 2004 than they were on February 10, 2003 — the day the SARS virus first made headlines.

And within four years after the SARS outbreak, the S&P 500 had doubled, the MSCI EAFE Index of international stocks had tripled, and the Shanghai Composite had quadrupled.

 

 

This time around, stock market history might not repeat itself exactly, but it will probably rhyme.

Today’s coronavirus-inspired stock market panic is probably creating a buying opportunity that will reward investors over the ensuing year or two.

To be clear, investors cannot afford to be cavalier about panic selloffs. They are treacherous and unpredictable events.

That said, investors can tiptoe into the water during moments like these to begin establishing new positions in compelling, long-term investment opportunities, or to add to existing positions.

If I had to guess — and it would be just a guess — the coronavirus-inspired selloff will be fairly shallow and fairly brief.

Although the coronavirus is certainly a frightening global phenomenon, so are many contagious diseases. Sometimes we forget how dangerous the “ordinary” flu can be. This year’s flu season here in the United States has sickened about 20 million people and claimed 10,000 lives — or nearly four times the global death toll from the coronavirus.

And yet, the wheels of progress do not grind to a halt every winter.

Meanwhile, more than 1 million people worldwide die in traffic accidents each year. And yet, we still get behind the wheel and drive to the supermarket.

Bad stuff happens. And the coronavirus epidemic certainly qualifies as “bad stuff.” But unlike our daily car accident fatalities, viral epidemics do end eventually.

We do not yet know how large the coronavirus epidemic could become before petering out. But it will peter out eventually.

To be sure, this epidemic will take a bite out of global GDP, especially the Chinese portion of it. Similarly, the epidemic will take a sledgehammer to the near-term growth trajectory — and share prices — of companies operating in the travel and leisure sector.

The below chart shows the pain the coronavirus is inflicting on stocks in the travel and leisure industry.

 

 

One of those casualties is Gogo Inc. (GOGO), the company that provides in-flight internet connectivity for the airline industry — and that we added to our portfolio back in November. Because the coronavirus epidemic is forcing the airline industry to suspend many routes or, worse, fly half-empty planes, Gogo is suffering as well.

We don’t yet know how badly the coronavirus will harm the airline industry in general, or Gogo in particular, but many investors are choosing to sell now and move to the sidelines.

That caution may be warranted, but I suggest hanging in there for now. I continue to like the fundamental story at Gogo and believe the company possesses strong growth prospects.

Generally speaking, I recommend using the current weakness to establish new positions in select stocks or to add to existing ones. But I do not suggest throwing caution to the wind and making all your purchases at once. Instead, design a plan to purchase a specific selection of stocks over the span of a few weeks.

Doing nothing is also an option. You could simply buckle up and prepare to ride out the stock market volatility.

That isn’t a bad idea.

In fact, “doing nothing” is the approach I’ve been taking with respect to issuing new Fry’s Investment Report recommendations. I have several stocks on my radar that I am eager to recommend. But not surprisingly, all of them are lower today than they were last week.

So for now, I’ll stand aside. But once the market stabilizes a bit, I believe we’ll be seeing some great buying opportunities.

Regards,

Eric Fry
Editor, Fry’s Investment Report