Weathering the Coronavirus Financial “Crisis”

March 4, 2020

Is the panic from the Coronavirus rational or being blown out of proportion?

As financial markets plunged, the Fed stepped in on March 3^rd to issue its first emergency interest rate cut since the 2008 financial crisis.¹

The Coronavirus death toll recently broke the 3,000 mark, which is extremely unfortunate but needs to be put into perspective. The flu kills an estimated 56,000 per year², and you don’t see Costco’s being raided for supplies. Nor does the Dow Jones Industrial Average drop every time there’s a new case of flu announced.

Granted, there is a legitimate reason to sound the alarm. China’s economy has virtually stopped in an effort to contain the virus. The supply of everything sourced in China, from iPhones to aspartame, is suddenly at risk. With the US and other importers sitting on an average of 90 days of goods and materials, those supplies are quickly dwindling.³

There’s also concern about this widespread panic causing people throughout the world to stay home. This means not going to the office, decreasing social outings, and avoiding shopping trips. As people pause their daily routines, the fear that the economy could grind to a halt all sounds somewhat plausible.

Hidden Opportunities?

Despite the “falling sky” mentality, there are opportunities to be had, but maybe not where you expect. While everyone else is scooping up stock in Clorox, protective mask manufacturers, and pharmaceutical companies developing a vaccine, the smart move might be to look for companies with solid fundamentals that have taken a beating in the market.

For example, Carnival Corporation (the owner of the ill-fated Diamond Princess) is down nearly 38% for the year. Most investors might believe a continued drop is on the horizon, but it’s possible that the stock bottomed out at the end of February because it’s been on a tentative uptick since the first of the month.

Another overlooked, but decidedly unsexy idea is to invest in companies that make basic goods and services. No matter what happens to the economy, people are always going to need toothpaste, toilet paper, and grocery staples.

Many of these stocks can be picked up for a bargain right now, including Kraft Heinz, which is down over 19% for the year.

Other stocks have remained relatively stable, so you might not have a significant upside, but you could still benefit from dividend cash flow. For example, Proctor & Gamble is down only 7% from its 52-week high, but the annualized dividend payout is $2.98. You could grab yourself a few shares of P&G at a discount and also take advantage of some extra cash flow next quarter.

Should You Do Nothing?

According to MarketWatch, you could also sit back and do nothing. Even though watching stock values drop can make your heart go aflutter, these market corrections are also relatively common. If your overall view of the market is bullish and you believe that the Coronavirus is a small blip in an otherwise growing economy, then you can maintain your holding position and take a “wait and see” tactic.

Or, Should You Buy It All?

So far, the DJIA has lost less than 10% of its value since the beginning of the year. This number might seem high, but is it as low as it can go? Some financial experts are forecasting a drop that could range from 14% to 32%. Is now the time to buy everything you can, or should you wait for stock prices to drop even lower?

If you’ve got the stomach for it, then you might want to consider Baron Rothschild’s advice to “buy when there’s blood in the streets” and wait for the market to dip further before making your move. Rothschild took a famously contrarian view to investing when he made a fortune in the panic that followed the Battle of Waterloo against Napoleon.⁴

By going in the opposite direction of the crowd, you can identify opportunities that no one else is brave enough to take advantage of.

Bottom line: Fear and uncertainty tend to create volatile markets. Brace yourself for a bumpy ride during the next few months. And, of course, the companies we mentioned in this newsletter aren’t meant to be interpreted as recommended stock picks. They are merely examples illustrating a point and showing what is possible if you look at the market rationally.

Where you can potentially shine as an investor is going in a different direction than most people. Instead of blindly following the herd, take a step back, and look for opportunities that others might miss.