After the markets got off to a strong start in 2020, a highly contagious coronavirus centered in Wuhan, China, has many investors running for the exits. Despite swift action from Chinese authorities to contain the unknown strain, including shutting down Wuhan, the new virus continues to spread rapidly.
As fear cascades among investors, the market has been shaky in recent days, and Monday saw the Standard & Poor’s 500 (.SPX) index drop nearly 1.6 percent. And so after a strong start to the year, the S&P 500 is now up only 1 percent since 2020 began.
“While it remains early, it will be important to watch the impact of the virus’s spread, especially on the Chinese economy and financial markets,” says Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “The other factor to watch will be…whether the consumer shift, if it happens, is global or contained.”
Meanwhile, the Centers for Disease Control and Prevention (CDC) have confirmed a growing number of cases of the virus across several U.S. states, and among investors a “sell first, ask questions later” sentiment appears to be taking hold.
The news is also having an effect on mortgage rates – dropping them even lower – as some investors flee to safe haven assets such as U.S. Treasury bonds. Even gold has rallied modestly over the last couple weeks. In the face of growing pressure on global markets, here’s how investors can avoid the short-term noise and keep their portfolios protected.
Coronavirus outbreak: Which stocks are getting hurt?
“Tourism and consumer-related sectors have already taken a hit, seeing shares fall, and would likely be most affected should the outbreak not be contained,” says Sarah Bauder, investment analyst at SophisticatedInvestor.com.
These are the types of stocks that typically get hurt first in a pandemic, those that offer discretionary services to the affected region. Discretionary consumers have the option not to go there or buy goods or services that might be affected by an outbreak.
The S&P 500 is now off almost 2.6 percent from its high of the year, but many individual stocks have fared worse. Tech giant Apple (AAPL) is down 3.2 percent from its 2020 highs, while Disney (DIS) has plunged 8.3 percent.
For now, Chinese stocks and companies are the most heavily affected. Woozle Research has spoken with more than 250 professionals and businesses in China to see what’s being impacted the most.
“The biggest hit sectors are luxury goods retailers (for example, Burberry (BURBY), Gucci (PPRUF), Cartier (CFRHF)) followed by hotel chains,” says Mark Pacitti, founder and managing director of Woozle. “Late bookings and cancellations have been much higher than expected at most large-scale global operating hotel brands.”
Pacitti notes sizable effects on bars, cafes, and restaurants, too. “We’ve heard from lots of Luckin’s and Starbucks (SBUX) coffee stores that they have seen a noticeable drawdown,” he says. Sales at the locations they checked were down 20 percent from the same week a year ago, he says.
While the effects of the virus have been felt most prominently in China, the U.S. has felt some of the blowback as well, and may feel quite a bit more yet.
“There will be meaningful impacts on airlines, casinos, and services that have exposure in China,” says Michael Farr, president & CEO at investing firm Farr, Miller & Washington. “The culture in China when facing threats like an epidemic is to go home and don’t come back until it’s all clear.”
“If Chinese consumers opt to stay home rather than travel, consume, and spend, it could have a meaningful impact on global growth, especially since the manufacturing sector remains weak,” says Samana.
Investors should stay focused on the long term
While a panic rarely benefits a company’s stock, it can benefit investors, especially those who stay cool and keep their focus on the long term. Stocks that have plummeted may even make a bargain purchase for enterprising investors.
“Prior epidemics such as SARS and MERS caused meaningful economic impacts, but those impacts were transient,” says Farr. “Even the worst-hit stocks saw no real effect one year out.”
And the situation this time may not be as bad as in prior outbreaks.
Samana thinks that Chinese authorities are proactively getting ahead of the spread of the virus and the global response has been even more swift. As a result, he suspects “the market impact will be manageable.”
But even if it isn’t manageable, long-term investors may stand to benefit.
While casinos, airlines and hotels may be negatively impacted in the short term, they may offer the best opportunity, says Robert Johnson, finance professor at Creighton University.
“Unfortunately, many retail investors tend to overreact to events like the coronavirus,” says Johnson, who suggests that the hardest-hit sectors may offer the most potential to bounce back.
“Whether it be Brexit, the Greek debt crisis, the standoff with Iran or the debt ceiling crisis, retail investors generally lose when they make portfolio adjustments in reaction to the crisis du jour,” he says.
Protecting your portfolio: What else can investors do?
The short answer to the question of what to do is probably nothing. If you’re buying stocks regularly, you can probably continue and weather this panic fine. If you were already planning to shift money into a high-yield savings account or CD account, then stick to your plan. The furor over this coronavirus may end as quickly as it began, though it remains to be seen.
Still, if you feel compelled to do something, the smartest decision may be to look for stocks that have been beaten down too much and snap up bargains when they arise, as Johnson suggests.
“If your investing discipline includes stocks like casinos, airlines, international air shipment companies, keep your shopping list out, as more attractive entry prices will likely appear,” says Farr.
That doesn’t mean stock prices will rebound in short order, but as the scope of the crisis becomes clearer and more limited, investors will likely regain their composure and bid these affected stocks higher again.
And if investors become even more nervous and the selloff extends to stocks that have nothing to do with China, it could offer further opportunity as well.
Investors usually do best when they can avoid day-to-day volatility and focus on the longer term for their investments. Over time investors can win by owning well-managed businesses that provide products and services that consumers need and love. While there may always be a short-term blip in the market, it’s a better practice to stay calm and maybe even buy a little more when stock prices become too cheap.
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