Market Update – Covid-19 Coronavirus Scare

By Brian Johnson, Viridian Chief Investment Officer and Shareholder

February 28, 2020

Summary:  Due to fears related to the COVID-19 coronavirus, stock markets have experienced a rapid sell-off in the last six days that is nearly unprecedented. Though we don’t want to downplay the seriousness of a potential pandemic, history demonstrates that declines caused by health scares are often short-lived. I expect that if government interventions begin working, we’ll see stock markets begin to recover.

The recent advancement of the COVID-19 coronavirus beyond Chinese borders, and now across multiple continents (1), has investors afraid of the potential economic implications of the virus expanding from an epidemic to a pandemic. In fact, these concerns have meaningfully pushed down interest rates, and have led to the fastest correction in the S&P 500 from new highs to a 10% decline in history (2). The S&P 500 now finds itself at mid-October 2019 levels. 

While no one can say for certain what the coming weeks and months will bring in terms of market performance, a look at history can be instructive.

History suggests that declines caused by health scares are typically quite short-lived. In fact, the MSCI World (stock) Index has been, on average, higher one-, three- and six-months following prior epidemics.

However, history doesn’t always repeat itself. The COVID-19 coronavirus has unique characteristics that make it hard to compare directly to prior epidemics, and we certainly don’t want to minimize its potential impact.

Among the variables that make this virus hard to compare:

  • In as many as 80% of the cases, the symptoms themselves are mild, meaning that the carrier can infect others without knowing it.
  • While there are many projections, we don’t really know the mortality rate of the virus. The rate inside China seems near 3% (although that may be partially because they aren’t reporting true numbers). Outside of China, there have been, according to Johns Hopkins figures as I write this, 77 deaths in 5206 cases, a rate of 1.47%.
  • Social media and the internet have created unprecedented awareness of the virus. We’re all becoming “experts” on COVID-19 far faster than any other epidemic in history.

Ultimately, the market’s reaction to this outbreak will depend on the severity of the virus and the effectiveness of government interventions. Markets are forward looking and are in the business of measuring perceived future economic impact rather than actual impact. At present, the markets are telling us there is significant potential for bumps in the economic road going forward.

For perspective, it is also worth remembering that the S&P 500 averages three 5% declines and one 10% correction per year. In fact, on average, a 15% correction occurs every other year, and a 20% drop (which technically makes it a “bear market”) once every three years.

Most importantly, always remember that your portfolio is invested specifically towards your goals. For the portion of your money intended to meet needs/goals that are short-term in nature, we traditionally invest very conservatively, with most or all of such money in “fixed-income” holdings (primarily bonds). Money needed for goals of a longer-term nature (7-10 years and beyond) is able to withstand more short-term fluctuation (volatility risk), and still recover by the time you’ll need it. That’s because the stock market has the ability to recover from corrections like the one we’re experiencing now, within a few years.

Your exact allocation may vary from other people’s, for a number of reasons, e.g., tax considerations, portfolio transitions, your age and income, and investment costs. Our model allocations are always aimed at taking risks that are in line with your short-, intermediate-, and long-term goals. Your Viridian advisor has made recommendations for allocating your money across our different Viridian strategies based on those goals.

Three Viridian strategies keep a significant portion of their money out of the stock market, in part to reduce volatility, but also to eliminate the need to sell stocks to meet your short-to-intermediate term (within next 5-7 years) needs and goals:

  • Our Viridian Preservation portfolio generally (and currently) has a 100% allocation to fixed-income (0% to stocks), and it has produced positive returns both year-to-date and for the month of February (through 2/27/20).
  • Our Viridian Conservative strategy keeps a portion of its money in stocks (currently just 28%) to help keep your principal growing to offset inflation over time, but the majority (72% currently) is allocated to fixed-income and real-estate investments.
  • Our Viridian Balanced strategy currently holds 50% stocks and 50% fixed-income securities.

The fixed-income portion of all three of these strategies is designed to meet your short-to-intermediate-term needs. That means you won’t need to sell stocks (at a time when they may be depressed in value) for the money you need to live on and/or for other goals.

On the other hand, money that you won’t need within the next 7-10 years should be invested mostly for long-term growth, and that means equities (stocks). This includes the stock portion of the above strategies, as well as our two strategies that are solely for long-term goals—Viridian Growth (100% in equities), and Viridian Aggressive (currently about 90% in equities).

As usual, we’ll continue to monitor the markets and our strategies on a daily basis, especially while there is a great deal of uncertainty, both with regard to COVID-19 and the election. The important thing, however, in terms of our next steps, is that we let history and our systems be our guide, and not fall victim to our emotions.

If you have any questions about this, or if you have experienced big changes in your lifestyle or goals that might warrant reviewing the allocation of your investments, please don’t hesitate to contact your Viridian advisor. It’s never been easier to get in touch with us as you can always call, email, or now schedule an appointment through our website or the link below. If something is keeping you up at night we want to know and understand how we can help.

Click here to book an appointment.


(1) Source data: Johns Hopkins CSSE – https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

(2) Source data: Deutsche Bank

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