Thoughts on Potential Coronavirus Impact On Markets

Burkekoonce

February 27, 2020

Whenever weeks like this come along I am reminded of a quote from renowned social psychologist and former heavyweight champion of the world Mike Tyson, who pointed out that everybody’s got a plan until they get punched in the mouth.

Fear surrounding the coronavirus outbreak has gone from a blip to a blimp in one month. Suddenly everybody on Twitter is an epidemiologist and everybody on CNBC has a model that indicates support at this level or that level but the fact of the matter is that the United States has never in modern history been poised to experience a viral outbreak of this magnitude and nobody really knows what to expect.

As this relates to financial markets, we have seen a significant spike in the VIX index, which measures market volatility. The VIX, which had been plodding along at around 15 for the last 200 days, has spiked at the time of this writing to about 32. This indicates an elevated level of anxiety in the market but not yet panic. This is nowhere close to the level of volatility experienced back in the teeth of the financial crisis in late 2008, when the VIX reached 89.5 on October 24. The VIX spent months in nosebleed territory that terrible year but it started declining as the calendar turned into 2009.

Since then we have had just a few notable spikes amid markets that have generally been characterized by their relative calm. Only twice has the VIX jumped above 50—in August 2015 when the Chinese equity markets collapsed amid a 2 percent devaluation of the Chinese yuan, and, notably forgotten, the V-shaped crash and recovery in February 2018 as interest rates suddenly reversed years of declining and began to climb. We had the “flash crash” in May 2010, and U.S. sovereign debt downgrade of August 2011, and the mini-panic of December 2018, but none of these resulted in the VIX index hitting 50.

This feels a little different.

A highly contagious virus testing the ability of the United States to protect its citizens seems likely to be negative for financial assets in the near term. Again, we simply have not seen anything like this in this country in living memory.

Even so, the full weight of the American economy is unlikely to be permanently impaired by a viral outbreak that is showing signs of slowing down in the country in which it originated. Obviously this has the potential to be hugely disruptive for the economy in the coming months, especially travel and leisure-related industries. Measures will have to be taken to ensure liquidity in markets. However, it is hard to imagine, for me anyway, that the system will not withstand this threat and that markets will not resume their long-term trends. (Notably, equity markets in China and Hong Kong are now well off their post-outbreak lows.) After all, these episodes—the flash crash, the yuan devaluation, etc.—are just that. They’re episodes, not the season.

If there was ever a week when I was glad to see Warren Buffett on television, it was this one. When asked what his response to the outbreak would be, he pointed out that over a 20 to 30 year period, it would be hard to see the coronavirus having any real impact on the businesses he owns, despite any near-term interruptions. He said that while he might not be buying anything this week, he certainly wouldn’t be selling.

Any opinions are those of Burke Koonce and not necessarily those of Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

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