Clients worried about the coronavirus’s roiling effects on global markets deserve financial advisors’ best answers about its unique impact on the global economy and what we know — and don’t know — about how it will play out.
From an economic perspective, this needs to be a wake-up call to companies that rely on supplies from far-off nations.Worldwide viral pandemics occur on average every 25 to 30 years — long enough for us to lose our memory of how bad they can be and to lower our guard on preparedness.
There is one stark difference economically between the last serious pandemic in 1968 — influenza — and the current coronavirus outbreak: We now have a global supply chain that concentrates production of needed goods in just a few small areas. Lockdown of these supply chains in an effort to contain the virus is causing significant market upheaval.
For example, rare-earth metals are mined primarily in China. These compounds are required in most high-tech industries and the United States is a major importer. We have the ability to mine these resources but it is much cheaper to purchase these materials, so formerly working mines have been shuttered until just recently. Hopefully companies reassess just-in-time production and supply-chain resiliency policies so they will be less impacted by any future upheavals.
Thankfully, at this point, this novel coronavirus appears no worse, and likely less severe, than our particularly bad influenza virus this season. The CDC estimates that 16,000 to 41,000 people have died from the flu this year. Unfortunately, you don’t see that in the press. And the worst part is that we have immunizations for the flu and people don’t take the time to get protected.
But the problem with a novel virus is that, by virtue of its newness, people have no immunity — and vaccines can take a year to produce. It will take time to understand the severity of the virus. Will mortality continue to be about 2% of those infected, according to current numbers by the World Health Organization? Or will mortality turn out to be much higher, approaching, on the extreme range of the spectrum, the 60% death rate from the 1918 flu pandemic?
Fear and worry are rampant. One client asked if any other client had recently returned from China.
These unknowns breed fear, and fear infects the economy and the market.
So what is an advisor to do?
From a financial planning perspective, epidemics are like any other geopolitical upheaval. We know clients should be invested in the stock market only to the extent they can stomach risk both psychologically and financially. If a severe market downturn that results from any event (epidemics, wars, election results, etc.) will make them lose sleep, they need to readdress their investment policy and allocation of stocks and bonds.
From a medical perspective, we have been woefully underprepared for any major epidemic or bioterrorist event for a long time and it is only getting worse. President Trump’s recently released budget cuts funding for the CDC by 19%, including a $25 million cut from public health preparedness.
But all market upheavals provide an opportunity for education. Share with clients concerned about their portfolios the need for our politicians to put better protections in place, both in public health and in economic resiliency. Our public health system has been starved for funding by both parties for decades. Public health is not a high-cost service to begin with, and the economic security a well-funded public health system provides greatly outweighs the cost.
Other global health threats, such as SARS, did not have long-term impact on stocks. COVID-19 might be another matter.
Finally, remind them that viruses will continue to evolve but that for now, it is imperative to take advantage of the prevention we have available today — like getting a flu shot.
Prevention is by far the best medicine — both for our personal and finance-related health.
