Profit Now AND Profit Later

Written by Adam English
Posted February 25, 2020

After yesterday’s 1,000-point drop in the Dow — which is strange to think of as only 3% — and today's drop looking like it'll settle around 750 to 800, we are in a tough place.

But we aren’t in completely uncharted territory.

You can find plenty of articles around comparing the current coronavirus outbreak to past outbreaks, and I'd bet there are more of them than you’d remember.

Here is a handy condensed table that gets right to the point:

outbreak dow performance table

Looks pretty good, right?

The simple fact of the matter is that outbreaks in recent history do not have lasting effects on the stock market.

That’s comforting. It is also over-simplified. To be more clear, small and contained outbreaks did not have a lasting effect. We clearly aren't there yet and can't count on it any time soon.

Take, for example, the SARS outbreak. It affected about 8,100 people with 774 deaths, mostly in China and Asia.

We’re at 80,000 and counting with the new coronavirus, and global and U.S. stock markets really haven’t done anything but give back this year’s gains.

Similarities aside, the SARS outbreak and new coronavirus outbreak aren't good for an "apples to apples" comparison.

global stocks and corona virus cases

Note that the scale for stocks is linear, while the scale for reported cases is logarithmic.

Plus the world economy has dramatically changed since many of these events.

Back during the 2003 SARS outbreak, China accounted for 8.7% of world GDP. Today it is nearly 20%.

Global trade and expansion was strong then. Now, not so much. China in particular just posted the lowest growth in three decades. It is struggling and failing to stop a long-term slowdown and Chinese corporate lending has created a host of zombie companies loaded with massive debt, from the government, banks, and shadow sources.

Today, stocks are considerably more expensive. The S&P traded at 15 times price to earnings. Now it is 22. We have far more risk baked in.

But there is some good, at least for stock prices, in this complex mix too.

This all but guarantees that the Fed will not raise rates, and the market is now making a big bet that it will ease this year. Nothing gets stocks pumped up quite like that.

But we can’t count on that yet. Supply chains are getting worse and we won’t know how bad it is for a while yet. Apple has already issued warnings, amongst so many others.

Commodities are slumping except for precious metals, which are soaring. At least for now, we’re in a “risk off” environment.

We can certainly expect the stock market to see some hefty and quick gains when this is over. Until then, we will look for our profits elsewhere.

The stock market is vast and, while our core holdings are being bombarded with bad news and elevated risk, other investments are being bolstered by multiple catalysts.

Gold is certainly one of them. Recent price moves are drawing investor attention to safer allocations. We're seeing a classic melt up right as cyclical factors like development and exploration and depleting reserves are lining up to push prices higher long-term.

For now, I’d bet that we’ll still see the Dow up through 2020. Our core portfolios will probably be range-bound or even do the new normal — rise on signs of weakness thanks to cheap debt and Fed intervention — through this outbreak.

But for now that isn’t what I’m going to bet my money on.

Let’s get our money working for us now where it can make a difference and ride this out knowing that we’re well-positioned regardless of how this outbreak pans out.

Take care,

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Adam English

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Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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