Source: Yahoo Finance
Coronavirus is here and from the attention, it is receiving it feels as if it will be with us for the rest of our lives. While this is the top story of the day, please try and remember that global pandemics are not new and there have been many “illnesses” in our past that remarkably we have survived and continue to flourish.
Zika in 2016 – 1.5 million cases.
H1N1 in 2009 – 60.8 million cases and counting. Still around until this day and actually started in the early 1900s.
Avian Flu (H5N1) from 2004-2007 – Scientists called for the potential of 20% of the world’s population getting infected. Turns out to have less than 1,000 cases
SARS in 2003 – 8,000 cases (251 in Canada)
Coronavirus (COVID-19) – 83,774 cases. 60 in the US and 14 in Canada.
This new case still has created a major scare in the world and is having a large impact, as there are fears that this will really begin to disrupt supply chains around the world as factories may temporarily shut down, people will be refraining from going to work and transport coming to a halt. These and many other factors all of which have a financial impact on company earnings, but this is not expected to be a long-lasting impact similar to the above-mentioned illnesses that we have overcome. We have put those in our rearview mirror and eventually, we will do the same with COVID-19. As we speak two companies are leading the charge on creating a vaccine (Gilead and Moderna) and clinical trials are expected to begin shortly. In China, they are already testing their vaccines on humans infected with the disease. Once a vaccine is created it should help calm some fears going forward.
While the disease has taken over the headlines there has actually been quite a bit of economic news that has aided this decline, so we can’t give COVID-19 all the credit. Bernie Sanders took the lead after a couple of successful debates, in the race to be the leader of the Democrats in the upcoming election. On his platform, he plans to abolish all health care plans, this is a major change in the system and has caused health care stocks to be down significantly more than the average index. Most of these drops were prior to the COVID-19 spread globally. On top of this, he laid out a slew of new tax initiatives that would not be great for corporate earnings, this includes a wealth tax and a new corporate tax for companies with earnings of more than $100 million per year. This corporate tax would essentially hit almost every publically traded company people invest in. The GDP growth in Germany slowed to 0% in the last quarter of 2019, on the back of decreased auto sales, which had been a theme for the past 3-4 years as fewer people are buying cars. Germany is doing what it can to help its struggling auto industry even going as far as delaying the construction of the Tesla factory set to be built within its borders. Japan’s 4th quarter GDP actually went negative after a sales tax increase and a massive typhoon hurt their economy. Hong Kong has been in a technical recession as they have experienced 3 consecutive quarters of negative growth due to the long-standing civil protest, which has led to a massive decline in tourism and money flowing out of the country. The United Kingdom posted a 0% GDP growth rate last year due to BREXIT. As you can see we went from the all-clear in January to a domino effect in February that was headlined by Coronavirus, but that was not the only story of the month.
In Canada, we have reported only 14 cases of coronavirus, but we had two major drawbacks in February. The first being Teck Resources pulling out of their $20 billion project, rather than wait for government approval due to environmental issues. While the result was unclear, the path most likely would have been long and drawn out, so they decided to not participate rather than proceed. Secondly, we had a major railway blockade protest stopping railway transit across the country. For a country where rail is such a large part of how we transport goods, this was a major delay in our economy. Our Prime Minister has ordered the blockades removed, but they continue to protest and still delay trains, this will undoubtedly have an effect on our economic numbers.
In the US, numbers have been strong but the fear of coronavirus has gripped the nation. The big fear would be if the US were to falter, the world’s economic engine could be slowed as the US is been the main catalyst that has been keeping all of us going over the past 5 years. There has been a $2.5 billion budget announced to combat the virus and they are doing everything they can to stop the spread. The positive is that the US (along with Canada) does have the healthcare system to handle the sick. The negative is that both of our countries do not have the authoritarian government to quarantine entire cities as China does.
At times like this, we need to calm down and not reflect on the last week that just happened, but rather what the market and your investments look like going forward. Investments are lower than they were at the beginning of the month, which is good for purchasing new investments. There are many opportunities that present themselves in times like this. Going forward there should be an economic impact of the Coronavirus which is not great in the short-term, but this most likely we force the US Fed to cut interest rates in the future. This makes equities (stocks) far more attractive in the environment going forward. If a government bond is paying around 1.5% and a strong dividend-paying stock is paying 5%, using simple math, the right investment choice is easy to make. We must remember that stock is an ownership stake in a business, these businesses are not going bankrupt. If you owned a restaurant and coronavirus slowed business for the winter of 2020, you aren’t just going to close your doors. The people running these multi-billion dollar businesses that trade in the stock market are the most successful people out there in running a business and they did not get to where they are by being unprepared for events like this.
We still recommend equities in the long run as we are in an excellent environment for stocks to grow. At this time, we are very pleased with our alternative investments as they continue to be rock solid during this frenzy, this type of event is exactly why we add these types of investments to a portfolio to protect your assets when the market acts irrationally.
Our investment thesis remains the same with a balanced approach (Public vs. Private Investments). However, since the market has seen a sharp fall in the last week of the month, many oversold publicly traded companies that looked to expensive before are becoming an attractive opportunity for the long-term. We believe every investor should hold a diversified mix of Equities, Alternatives, and Fixed Income just like the pension funds and endowment funds do.
Time to get ready for tax season, make sure you have all your necessary slips and documents. If you need help with anything please let us know and if you do not currently use a tax professional we highly recommend one that you do. We would be happy to introduce on to you if you wish, as penalties resulting from filing an inaccurate tax return can be hefty and a professional can help that.
Lastly, we made it through an entire market review without mentioning Donald Trump, you are welcome.
Justin, Konrad, and Merriel
More articles and information is available at www.lkwealth.ca