What Does COVID-19 Mean for Stocks? What Does COVID-19 Mean for Stocks?

last updated

Stocks took a tumble in February 2020 thanks to COVID-19 (the coronavirus). What should you expect?

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.

For more health details on COVID-19, the World Health Organization COVID-19 and US Centers for Disease Control and Prevention COVID-19 sites have useful information.

What happens to your investments?

Demand Shocks from a Potential Global Epidemic

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.

Several large conferences and events have already been suspended or canceled. For example, the annual SXSW conference brought over $330 million to Austin in 2019. That money won't be spent there at that scale this year, now that the event has been cancelled.

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.

Every dollar deferred is less profit for businesses, and every dollar less in profit means the business is worth less, so the valuation goes down.

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.

The market has to price in the cost of ineffective policy and the risk of that policy getting worse. The market has done that and will continue to do so.

Should Value Investors Worry about COVID-19?

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.

What is Cash Return on Invested Capital? | How Does Social Distancing Affect the Economy?