In late 2019 and early 2020, a new virus appeared in China and then spread
around the world. COVID-19 is a type of coronavirus, like the flu. By the end
of February 2020, fears of economic effects of the spread of this virus had
caused some big losses in the stock market.
Why?
In short, because no one's sure what's going to happen, how long it's going
to last, and how bad it will be.
While there are reports of people stocking up on supplies of things like
toilet paper, bottled water, and anti-bacterial wipes and lotions in the short
term, it's possible that people will go out less and spend less in the short
term.
That's hundreds of millions of dollars that won't go to hotels, restaurants,
ride-sharing services, clubs, stores, and other types of businesses in
Austin—businesses that count on this money every year to turn a
profit.
That's businesses that won't make a profit and might go out of businesses.
That's servers who won't make as much in tips. That's workers who might not get
shifts and won't get full paychecks.
For every dollar tourism brings in, the velocity
of that money multiplies its value. The ripple effect of removing hundreds
of millions of dollars hurts lots of people in Austin and Texas and the US.
That's just one event.
If workers work from home, isolating themselves, they'll spend less money
commuting (bus fares, fuel purchases, parking). They'll eat fewer lunches at
restaurants near their offices. They might put off buying that new suit or
those new work shoes.
As demand decreases, so does the value of a stock.
Supply Shocks from a Potential Global Epidemic
Of course, stocks like Apple and Boeing have other problems.
Suppose Chinese factory production drops because people can't come to the
factories to work (they're too sick, they need to take care of sick family
members, etc). That's fewer iPhones and iPads that Apple can sell.
Suppose airlines cut back on flights because fewer people are flying. That's
fewer planes they need to order from Boeing or Airbus. (What if Boeing can't
get all the parts they need in their complex supply chains because there aren't
enough factory workers in all of the countries they use?)
We won't see the full effects of this for months to come (it takes a while
to build a 737 after all). But if fewer people buy airplanes and if fewer
iPhones are available to sell, Boeing and Apple will make less money and
they'll make smaller profits and their stocks will be worth less money.
Even if the demand were there—people will still fly and people will
still buy new phones—you can't sell something you can't make.
Fiat Shocks from Responses to a Potential Global Epidemic
That brings us to the United States, and what appears to have been the Trump
administration's response to COVID-19 cases in the US: a clownshow of
incompetence.
Where previous potential pandemics such as SARS and H1N1 were serious and
taken seriously and didn't turn out to be as deadly as they could have been,
the Trump administration's gutting of the CDC, ignoring preparation, and
putting politicians in charge of scientific responses seems to be a laughable
attempt to deflect responsibility rather than a sober plan to contain (or at
least delay) a serious health emergency.
The best case scenario is that COVID-19 turns out to be limited in effect
and duration, and runs its course quickly.
Yet a global world must plan for worse scenarios, by ensuring that testing
and quarantine procedures are in effect, that scientists and researchers have
the tools and opportunities they need to reduce risks, and that health care is
available for this and other serious conditions which could be affected by
emergency responses.
Savvy value investors will look for value over the long term. Despite some
awkward market drops, remember that—so far—losses have returned
whole-market prices to levels of late 2019. It's not a panic.
If you're investing for 10, 20, or 40 years, a tumultuous few months won't
hurt you. It may even provide new good opportunities.
That's no excuse to neglect your own health and the health of the people
around you though. Everything you can do to reduce the spread of
disease—wash your hands, don't cough on other people, ensure people who
need it can receive medical care, ensure people who need them can get medical
supplies—applies. The market response to a potential global pandemic
demonstrates how interconnected and global the market economy has become.
Don't worry about the market. Buy good stocks, look for value, and hold for
the long term.
