Wuhan Virus or 2019 Coronavirus has caused great fear globally, especially in Asia. Why? Here are 3 main reasons, having similarities to stock market with comparison to well-known SARS and common flu.
1) It is relatively unknown (how it is infected, etc)
For any new virus, whenever it is a stranger, people would feel fear. It is similar to black swan to global financial crisis, when the share price falls, investors do not know why and how it drops so much, the fear leads to more selling or shorting, getting worse (vice-versa, during dot com bubble, the greed for unusual surge in price could make one losing their mind in investment).
So, further research (eg. temporary medical solution) would help to reduce the fear. Transparency by government would help, else various personal news or rumors may make it worse.
2) It is relatively deadly (3% of those infected)
People worry because the consequence is death (3%). However, scientifically, when we compare Coronavirus with SARS and flu:
Coronavirus = 3% dead (about 81 death of 2800 reported cases so far)
SARS = 10% dead (about 774 death of 8094 cases reported)
FLU (yes, common flu) = 0.05% dead (about 8200 death of 15 millions cases estimated in US alone)
Usually people focus more on higher probability of death (fatality rate), ignoring the size of population infected. Therefore, SARS in year 2002-2003 partially contributed to regional financial crisis because it is very deadly, 1 out of 10 infected would die. The common flu actually kills much more people yearly but affecting mostly elderly people (“natural” cause of death), low fatality rate of 0.05% is usually ignored. Coronavirus is in between SARS and flu for fatality and size of population infected (likely more than SARS cases eventually based on the trend so far), therefore it is less fearful than SARS but more fearful than flu. In fact, based on actual number of death, flu is more “dangerous” than Coronavirus or even SARS.
It is also similar to Global Financial Crisis, the “fatality” rate is high, usually more than 50% drop in global stock indices, more than 90% drop for some cyclic stocks or even go bankrupt for some which may not last through the winter time of financial crisis at low optimism for a few years. Global Financial Crisis (Level 4 = global) attracts attention of global investors, therefore great fear. In fact, there are numerous crisis each day from Level 1 (company, e.g business is losing money) to Level 2 (sector, eg Oil & Gas crisis over the past few years) to Level 3 (eg. China stock crisis over the past 1 year) but the scale of “fatality” attracts different attention, therefore different level of impact on global stock market.
3) Mass Media Spreading of News
When a news is reported again and again many times each day, worse with social media (eg. Facebook, how many articles including my article here), it could become great fear in a short time. I went to a shopping mall and NTUC fairprice today, observed about 5-10% of people start to wear mask (they may not be sick but afraid of getting sick), more than usual (before the outbreak of Coronavirus). This is a Personal Analysis (PA) on impact of news (eg. reporting how many people die and where is it), showing Coronavirus could be a potential black swan for global stock market when population infected increase without an effective medical solution for more than 3 months.
The 1929 Great Depression (the greatest Global Financial Crisis ever), it lasted for about 4 years (1929 – 1933), significantly longer and more severe than modern global financial crisis (typically 1-2 years of bear market). In the era of 1929, communication technology was limited, news spread very slowly, could take days from 1 end of the world to reach another 1 end of the world. Therefore, the greed and fear could last much longer due to lack of spreading news in an effective way. Over the past few decades, global financial “crisis” just come and go (thanks to modern communication tools), as if “wolf is coming”, global investors could recover the “losses” after holding for another 5-10 years, if the stocks are fundamentally strong.
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Concern for Coronavirus vs flu is similar to driving car vs taking airplane. There are more car accidents than flight accidents but when plane crashed, the fatality rate is much higher (eg. recent Iran plane, also Malaysia Airline x2 cases over the past few years, as well as recent helicopter crash with NBA celebrity Kobe Bryant), worst it is being widely reported by mass media (newspaper, news, etc) and social media, creating great fear of taking plane (of course, the fear may last only for a short term). People may not so worry about driving car (especially when driving own car) as one may think they are in control (compared to taking plane, life could partially depend on pilot).
Back to Coronavirus, the fear or concern depends on many factors. Between life and money, clearly life is more important. Therefore, some healthcare stocks (eg. glove stocks with applications in healthcare) start to rise while airline stocks start to fall (F&B sector may also suffer if similar situation as SARS, few people dare to go out for dining).
One could not control certain things in life (eg. spreading of virus) but we could control our habits to reduce the probability of accident (eg. wearing mask, washing hands more often, etc) and also reduce the fatality with stronger immune system (healthy body, even got infected, more likely to survive, both Coronavirus and flu). However, one should not overstress oneself that sky is falling down as if global financial crisis. Business fundamental is critical for a stock in longer term. Similarly, one should strengthen our immune system (eg. exercise regularly, eat healthily, sleeping well, etc) which is an effective long term prevention of any unknown disease. Worrying too much would affect our health.
It is the same as stock investment, even as investor could not know whether the stock prices would go up or down, one could increase the probability of success by combining LO-FTP (Levels 1-4, Optimism 0-100%, Fundamental, Technical and Personal Analysis) and reducing “fatality” in investment with proper risk management (eg. diversification over 10-20 global giant stocks with strong fundamentals). While paying attention to prevention of Coronavirus, continue to learn about stock investment, many principles are applicable for both the virus and stock investment (more details in www.ein55.com).
