Stocks around the world are getting clobbered…
The Shanghai Stock Exchange tumbled nearly 3%. The Japanese Nikkei plunged 2%. And it was a sea of red today in London, Frankfurt, Paris, Milan, and Madrid.
And in the U.S… the S&P 500 is down 1.6%.
Giving investors the jitters is a deadly virus that’s spreading out of China and causing panic in the mass media.
They’re treating it like a potentially world-ending plague.
But is it a reason to panic? And what kind of impact could it have on stocks?
Today, we’re going to try to answer these questions for you…
We’ll also show you why – no matter what happens next with the coronavirus – every prudent investor should always be prepared for the worst.
As you’ll see, that means having plenty of “disaster insurance” in the mix.
It’s part of a family of viruses called the coronaviruses.
And that’s a worry, because the SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome) outbreaks were from the same family.
The SARS outbreak happened in 2003. It killed almost 10% of the 8,096 people in 29 countries who fell ill. A total of 774 people died.
MERS was even deadlier. It killed about 30% of people it infected. Since 2012, MERS has caused 2,494 confirmed cases in 27 countries and killed 858 people.
The current coronavirus outbreak began in the city of Wuhan in central China last week…
It causes flu-like symptoms. And it can be deadly.
As of this writing, the virus has infected nearly 3,000 people. It’s killed 81 people. And it will kill more… before the outbreak gets under control.
This is the biggest festival of the year. It’s also the biggest human migration in the world.
Over 400 million people typically travel by bus, car, rail, and air to spend the Chinese holiday with family at this time of year.
They also travel overseas to see family abroad. Think of it as Thanksgiving and Christmas rolled into one.
Our tech expert here at Legacy Research, Jeff Brown, has done a lot of business in mainland China and Hong Kong. As he put it in a note to me earlier…
The timing of this couldn’t have been worse due to the Chinese New Year, the biggest travel week for mainland Chinese to travel outside of their country for vacation. Entire Chinese cities have been quarantined, and China’s government is not transparent about what is going on. This is certainly cause for concern.
Jeff is speaking from experience. He was in Hong Kong during the SARS coronavirus outbreak in 2003…
I was living in Tokyo at the time and doing a lot of business in mainland China and Hong Kong. Somewhat stupidly, I traveled to Hong Kong days after the SARS outbreak began there.
I thought that SARS was mostly hysteria. So I continued about my normal business. But when I arrived in Hong Kong, a surreal scene confronted me. The airport, Airport Express train, and taxi lines were almost empty. By the time I arrived at my hotel, the lobby, the bar, and the restaurant were almost empty, too.
All the locals were staying at home so they wouldn’t get infected. That’s when I knew it was serious. I stayed one night, without leaving the hotel. Then I flew back to Tokyo early the next morning.
Scientists believe the virus began somewhere in Wuhan. And central China is ground zero.
But so far, Thailand and Hong Kong have each reported eight cases…
…Taiwan and Australia have each reported five cases…
…Singapore, Japan, South Korea, and Malaysia have each reported four cases…
…France has three cases… Canada and Vietnam have two… and Nepal and Cambodia have one.
The U.S. is also now on the map. So far, there are five reported cases of coronavirus infection on American soil.
So I can’t tell you where this is heading.
What I can tell you is that past coronaviruses haven’t been the world-ending plagues the mainstream press has portrayed them to be.
And so far, the current coronavirus outbreak seems less virulent than SARS or MERS.
That’s measured by how many people a newly infected person is likely to pass a virus to, called R₀ (pronounced “R naught”).
Highly contagious measles has an R₀ of between 12 to 18.
SARS had an R₀ between 2 and 5. And it didn’t become a world-ending plague.
And according to the World Health Organization, the new virus has an R₀ of 1.4 to 2.5.
Long story short, it’s not time to shop on Amazon for a hazmat suit. Nor is it time to push the panic button on your stocks.
It’s of the S&P 500 during the SARS outbreak.
The S&P 500 is our regular stand-in for the U.S. stock market. As you can see, it suffered a 14% drawdown (peak-to-trough fall) at the start of the SARS outbreak.
But by the end of the outbreak, it was higher than where it was when the outbreak first started.
It’s also worth noting that the U.S. invaded Iraq in the third week of March.
So what can we really say about the impact of the SARS virus on U.S. stocks?
Only that it likely caused some damage… but that damage was temporary.
None of the experts here at Legacy have given us any indication that the market is going to collapse.
But events like the coronavirus outbreak are good reminders to make sure you haven’t overextended yourself.
That means never chasing a stock above the buy-up-to price one of our analysts has put on a recommendation.
It also means using stop-loss orders, if they come with a recommendation. (By placing stop-loss orders, you automatically get kicked out of a stock if it drops a certain level below your entry point.)
And it means sticking to position-sizing recommendations. Don’t let hubris make you put $10,000 into a speculative idea you should be putting only a couple of hundred bucks into.
It also means NEVER putting 100% of your wealth in stocks…
As you know, we see lots of opportunities to profit in the coming years.
But that doesn’t mean betting the farm on more speculative bets.
You also want to own assets that are crash-proof – cash and gold.
Colleague and former hedge fund manager Teeka Tiwari has made this kind of diversification a core part of the long-term wealth-building strategy at our Palm Beach Letter advisory.
And he believes gold is one of the best diversifiers around. Teeka…
I recommend my readers keep some of their wealth in what I call “chaos hedges.” These assets you own as part of your overall portfolio mix to protect your downside in turbulent times.
Gold is one of the best chaos hedges. It tends to go up along with panic levels in the market. That panic could be about anything from an implosion of the world’s financial system… a war… or even the outbreak of a deadly virus.
Teeka also recommends you hold plenty of home-currency cash…
Holding cash is often seen as a purely defensive play. It’s a great way to shield your wealth from falling stocks. But cash also allows you to pick quality stocks selling at a bargain in a stock market panic.
Plus, cash allows you to pull the trigger on the perfect investment property… or a lucrative business opportunity that you discover.
Whatever it is, cash typically “meets the need” better than anything else. So it’s crucial to hold some… along with gold. And that’s especially in the late stages of a bull market.
So take the time now to run the rule over your portfolio…
How much of your wealth is invested in stocks?
If it’s even close to 100%, it’s likely way too high.
And that’s especially true if you’re approaching… or already in… retirement.
What about cash and gold?
Do you have enough of these cash-proof assets on board?
If the coronavirus… or another nasty surprise… caused the stock market to take a dive, would it be enough to shield your wealth?
If the answer is no, consider beefing up your cash and gold positions now.
Until tomorrow…
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Chris Lowe
January 27, 2020
Delray Beach, Florida
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