Just a month ago, investors were shrugging off the coronavirus correction, as the outbreak was mostly limited to China.
What a difference a month makes.
We’re now amid a global pandemic. Now that the TSX Index has plummeted 35%, with the S&P 500 following closely behind, we’re not only hearing about a recession from the talking heads on the Street. We’ve begun to hear some folks in the mainstream financial media bring up the thought of a depression — something we’ve not had in nearly a century.
The U.S. Treasury Secretary recently warned that a lack of fiscal action could result in a staggering 20% unemployment rate. That’s in the ballpark of the 25% global peak unemployment rate during 1933. So, it’s understandable that investors are concerned, but they still shouldn’t follow the herd by panic selling.
Coronavirus correction: Don’t expect a repeat of 2008
A depression is a genuinely terrifying concept for investors. In such a worst-case scenario, the “luxury” of a sharp rebound that followed the Great Recession’s crash of 2008 may not be in the cards.
As such, it’s only prudent not to expect this market crash to be a carbon copy of what happened 12 years prior. The circumstances are entirely different, and the fate of the market depends on the outcome of extremely uncertain contingent events.
A vaccine or life-saving treatment could send this market on a rally that Wall Street has never seen the likes of. Heck, the recession we’re falling into might even be milder than the one suffered during the financial crisis, depending on the events that unfold over the coming months.
Volatility goes both ways. You shouldn’t feel obliged to sell after a 35% drop, because most of the damage may already be in the rear-view mirror.
In the meantime, expect more circuit-breaking down days until a promising development happens or the infection curve has a chance to flatten.
Few things are more unpredictable than biology
The magnitude of uncertainty on Bay and Wall Street has arguably never been this high. And as you’re probably aware, there’s nothing investors hate more than uncertainty.
Nobody knows when the coronavirus correction will run its course or when an effective treatment or vaccine will be developed. Some pundits believe we’re a year (or more) away, but some companies, like Regeneron, may be well ahead of schedule and could have something promising by summer.
Still, when it comes to biology, you’re best off not trying to make predictions.
Not even the best epidemiologists in the world can give you an accurate timeline of what’s going to happen with the virus or when a treatment will be readily available. Many of them will tell you they’re not quite sure, because that’s the cold, hard truth.
A biological breakthrough could happen at any time. Or it may not happen for a prolonged period.
When it comes to biology, the uncertainty couldn’t be greater, making a biological crisis an extremely unpredictable beast that one should not attempt to tame. And you shouldn’t let it derail your long-term investment goals if you’re still on track.
Coronavirus correction: Is this biological crisis worse than the financial crisis?
Just because a few folks are bringing up the word depression does not mean you should panic-sell everything for fear that we’ll fall into a +80% crash that could take generations to recover.
A bet on the outcome of a depression is essentially a bet that the world will fail to beat the invisible enemy that is the coronavirus — a bet I wouldn’t make given the world is throwing in everything but the kitchen sink to fight it.
Yes, a pandemic is scary, and optimism (and liquidity) has dried up of late. But that doesn’t mean good things can’t happen after the barrage of negatives that have plagued this year.
The magnitude of fiscal stimulus could be unprecedented, and it could avert an economic disaster. Given “too little” stimulus has more dire consequences than having “too much,” it may be a better idea to be a buyer than a seller in these uncertain times.
As to whether this coronavirus crash is worse than the 2008 crash, we’ll only know after this is all over. However, I’d say a biological crisis has far more unknowns than a financial crisis.
Stay hungry. Stay Foolish.