The Capitalist Investor - Episode 4

It is regrettable and sad when a pandemic like Coronavirus impacts so many people across the globe. It’s a truly frightening situation for many people because there is a legitimate health risk related to the outbreak in many parts of the world.

But there are other concerns that while not as important as human life, are nevertheless important for the worldwide economy. Why is this important? Because the economy is the basis upon which we build your livelihoods as human beings.

On this episode, we ask and answer the question, “How does something like the Coronavirus pandemic impact the global economy?”

Outline of This Episode

  • [0:17] The details behind the Coronavirus scare (early Feb. 2020)
  • [4:10] How fear, uncertainty, and panic impact the stock market
  • [7:19] Comparing the current situation to past outbreaks
  • [12:55] Tune out the noise and focus on the overall direction of the economy

The global economy reacts to fear and uncertainty, but for how long?

In our current situation (mid-February 2020) the Coronavirus scare appears to have had a relatively small impact on the stock markets and the overall global economy, though it’s hard to trace such an impact directly. Initially, after news of the Coronavirus outbreak, the S&P 500, top to bottom, has dropped 3.38%. That’s significant, but not a pullback that’s going to dramatically impact the economy.

That initial downturn is not where we should focus our attention. We need to look instead at the possibility of long-term effects in a negative direction. That’s what tanks an economy and forces investors to make significant investment decisions to protect their portfolios. In this episode, Derek and I look at a brief history of pandemics and the real impact they’ve had on the economy short-term and long-term. Perspective is key when making investment decisions in a time like this.

Two of the worst health scares — and what happened economically as a result

There are a number of infamous influenza and viral outbreaks we could compare to the current Coronavirus Pandemic. S.A.R.S., Avian Flu, Swine Flu, The Pneumonic Plague, and others readily come to mind. In this conversation, we decided to focus on two that we consider the most serious from a health standpoint and from a cultural scare perspective — to examine both the short-term and long-term impact they had on the economy. What we found was quite instructive.

HIV/AIDS

  • HIV/AIDS became mainline news around June 1981
  • This is the only outbreak on record where there was still a negative trend in the S&P 500 twelve months later
  • That downturn is on record as 10.7%
  • BUT, we have to keep in mind that the economy was not in good shape to begin with, so the entire 10.7% pullback was not a result of the AIDS scare alone

Ebola

  • In March 2014, when the Ebola scare was known the S&P 500 experienced a 7% initial downturn
  • Six months later, the S&P 500 was up 5.34%
  • 12 months later it was up 10%

As we examine every other pandemic or health scare, we find the same thing. An initial pullback may occur but it typically doesn’t last long. That’s the information we need if we are to make sound investing decisions in times like these.

Warren Buffett’s advice rings true once again

Long-time Chairman and CEO of Berkshire Hathaway, Warren Buffett famously said,

“Be fearful when others are greedy and greedy when others are fearful.”

That appears to be sound advice today. Many people will react to the fearful aspects of the Coronavirus Pandemic by pulling their investments out of the stock market in favor of investments they perceive to be safer. But historically, what Warren suggests is true. The fear is generally unfounded and we will all do well to keep our heads in times like these.

Block out the short-term noise related to the Coronavirus Pandemic

What is immediate often seems urgent, but the fact is that riding out a temporary economic downturn is the wise course of action. What we’ve been telling our clients — who generally know this already — is that they should block out the short-term noise related to the economic impact of Coronavirus, because that’s all it is, noise.

When you do this you’ll be able to objectively look at the reasons for any downturns you see and make better investment decisions. Listen to hear why we say it this way, both from a historical and contemporary perspective.

Resources & People Mentioned

Connect with Derek Gabrielsen

Connect With Mark Tepper

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Keep Listening to The Capitalist Investor:
Episode 36:
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Episode 2:
Is the Stock Market Overvalued?
Episode 3:
Impact of a Bernie Sanders Presidency
Episode 5:
What We Consider A Smart Investment Strategy, Ep #5
Episode 6:
Why Investing In IPOs Is Not A Good Idea, Ep #6
Episode 7:
How a Joe Biden Presidency Will Impact Your Portfolio, Ep #7
Episode 8:
Special – Coronavirus and the Economic Shutdown, Ep #8