Coronavirus and stocks

Editor's Note

This article is sponsored by Livingston MacDonald Wealth Management.

We’ve seen some tremendous volatility in the markets these past few weeks. The spread of the coronavirus and the uncertainty around what the economic effects will be has spooked investors, sending them running to the sidelines.

The VIX – a measure of market volatility, hit 49.48 at the end of February. The only time it got this high in the last decade was Aug. 24, 2015. So we currently have the most volatility, in the last decade, save one particular day.

We’ve been here before – well not exactly here but close. There have been five seemingly intractable and incurable viral threats since 2003. The chart below summarizes them and the performance of the market immediately following the outbreaks.

cid:image001.png@01D5EE60.4E6BDAE0(Source: Fidelity funds Canada)

There will be a real human cost to this tragedy, most keenly felt in the poorer places where defenses and health care resources are at the lowest.  

There will be an economic cost as supply chains are disrupted and businesses work to adapt to the changing landscape.

But for those investors focused on the longer term, and considering where the best place to gain income over the coming decades, selling long-term holdings such as stocks into a short term panic is a questionable strategy.

Since the first epidemic, noted above in 2003, when the super-spreader of SARS – a fish seller – checked into a hospital in Guangzhou on Jan. 31, 2003 and infected the whole staff; the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), the index closed fairly close to four times higher at the end of February. 

There are setbacks, and the setbacks are real; but stocks increase 75 per cent of the time and decreases 25 per cent of the time. Dividends offer income that is higher than what you can get on bonds today – and the best companies increase their dividends each year. The math is in our favour.

It may be that the coronavirus turns out to be the great calamity that it feels like on today’s 24 hour news feed. But we would invite you to share our skepticism that this virus will be a permanent impact on the earnings of the great companies of the world.

This article is supplied by Alan MacDonald, an Investment Advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.

Livingston MacDonald Wealth Management helps young professionals with $200,000 or more of investment assets articulate and execute smart financial plans. Visit LivingstonMacDonaldwealthmanagement.com

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