Fear is Contagious

By: Matt Garrott

Stocks were off by about 3% yesterday on fears that cases of coronavirus are accelerating outside of China.  Should you worry?  For the “general American public“, the answer is no, according to the CDC.  Does that mean that only fools would be concerned by this?  No.  Identifying and dealing with threats is how humans have survived as a species.  It’s normal to watch the news, worry, then want to talk to someone about it.

 

Down 3%

Market pullbacks like this are not uncommon.  We had a 6% selloff in August of 2019 (tariffs) and a 6% drop at the end of January of this year (also coronavirus fears).  The last real correction was in the 4th quarter of 2018 when the market was down nearly 20%.  On average, there’s a correction of 14% each year so maybe we don’t even call this normal until we’re down another 10%?

The perceived importance of market drawdowns, however, is magnified because of how we collect and digest data.  We as humans are all relatively new to social media.  Whether it’s Twitter, Facebook, or Instagram, we have the opinions of a crowd at our fingertips.  Your feed may be telling you to panic over coronavirus, but other people’s feeds are full of spring training games, Saturday’s big fight, or Nevada caucus results.  If your feed is talking about just one thing, it’s easy to feel like EVERYONE thinks the same thing and that thing is very important.  Instead, it may be prudent to keep in mind Warren Buffett’s saying that pundits reveal “far more about themselves than they reveal about the future”.

90-9-1

Social media (more or less) follows a 90-9-1 rule of thumb.  90% of users merely lurk, reading and liking posts without creating content of their own.  9% are somewhat active.  1% create the vast majority of content and interactions.  What you see when you consume social media is mostly from people who are VERY ONLINE.  There are incentives for these folks to be first to share information.  Bad news and sensational stories are more likely to be shared due to human nature.

Coronavirus Fears

The coronavirus seems to be as contagious as the common flu, but less deadly than previous epidemics like SARS, H1N1, or MERS.  However, we didn’t have nearly as much transparency into them as we do with what’s coming out of China now.  Just because we are getting day by day (and minute by minute via social media) updates, today’s problem seems different and novel.  I suspect it’s like watching your house on Zillow.  In days past, you only knew what your house was worth when you bought it, got it professionally appraised, or sold it.  Now, you can look on Zillow and see your home’s value change every single day.  The constant updates on coronavirus, especially on bad days, get people talking.  Past outbreaks seemed to resolve with less drama, but this is partly due to a slower news cycle.

China

China’s position as not only a supplier of goods, but also as a newly dominant source of demand for goods is a relatively recent twist for the global economy.  I will be watching Apple stock as a proxy for this story.  A good amount of Apple products are dependent on the Chinese supply chain.  The rising Chinese middle class loves the iPhone.  Also noted is that the ‘Trade War’ between the US and China may have softened the blow of the coronavirus as businesses have looked to diversify their supply chains to avoid the chaos of knee-jerk tariffs and twitter tit-for-tat.

What to Read Before You Read Any More Headlines

Coincidentally, Warren Buffett’s letter to Berkshire Hathaway shareholders was just released.  As always, it is a reminder that having and following a plan are key to investment success.  Keeping calm while the rest of the world devolves into frantic arm-waving is a hallmark of Mr. Buffett and is especially important to keep in mind on days like today.  Regarding Berkshire Hathaway’s stock holdings: “Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers – dalliances to be terminated because of downgrades by “the Street,” an earnings “miss,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”

Coronavirus is the subject du jour and we agree that reacting to every update in the news is not the way to preserve wealth.  This is obviously a serious health concern and a danger especially to those susceptible to influenza to begin with.  However, we don’t see the recent coronavirus headlines as reason to change a financial plan.  Instead we recognize that fear is contagious, and it manifested itself in markets yesterday.  Your team at Fairway continues to monitor the markets and recommend actions specific to you and your needs.