Sunday, March 08, 2020

Coronavirus: Panic Leads To Pessimism

Don't get on an airplane, don't get on a train, don't get on a cruise ship, stock up on food and necessities, but don't go to public places where there might be crowds. The world is ending. The reaction to the coronavirus, SARS-CoV-2, outbreak appears to have moved into a panic over the situation. So one might ask why an investment person like myself is writing about this outbreak. The reason is my belief this is an unnecessary overreaction that is impacting the investment portfolio of institutions and individuals. The near cartoon places my thoughts in the proper perspective though.

I have written several recent posts on the extreme level of fearful investor sentiment, here and here. Reviewing the economic data to date suggests an environment where investors should be anything be fearful of the future. Jeff Miller, Ph.D. writes a weekly article that highlights recent economic data and expectations for the week ahead. In this week's article, Weighing the Week Ahead: Why it is Crucial to Use the Right Time Frame, he discusses some of the recent economic data and more. So why is fear driving the narrative. One author who seems to have an uncanny ability to put thoughts succinctly into perspective is Morgan Housel. His article from 2017, The Seduction of Pessimism, is a worthwhile read given the narrative around the recent virus outbreak. One comment that jumped out to me in his article is,
"We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely."
The seduction of pessimism then is grounded, not in facts, but thoughts that are not proven by facts at a particular point in time. As it relates to the stock market, when new highs are occurring on successive days, or simply month after month, the financial media is not running nightly shows titled, Markets in Exuberance. But faced with a market like now, the nightly show, "Markets in Turmoil," takes top billing on CNBC. As noted by Charlie Bilello, as of March 4, CNBC ran its ninth straight "Markets in Turmoil" evening special. Charlie included the following table in his tweet. Note the market's subsequent returns.

Let's face it, health experts are not in agreement on the appropriate course of action to take with this virus. In early February after the U.S. government instituted travel restrictions on China, the World Health Organization indicated this was not a good idea stating,
"Although travel restrictions may intuitively seem like the right thing to do, this is not something that WHO usually recommends," said Tarik Jašarević, a WHO spokesperson. "This is because of the social disruption they cause and the intensive use of resources required," he added. 
Experts said travel bans could lead to a slew of downstream effects and risk complicating the public health response. 
"There’s not only the financial toll on a country that is dealing with this outbreak, but this can discourage transparency, both in this outbreak and in the future," Worsnop said.
In the end it seems to be the unknown that is driving the panic and the unknown is what supports a pessimistic viewpoint. Readers should keep in mind, that the "CDC estimates that so far this season there have been at least 34 million flu illnesses, 350,000 hospitalizations and 20,000 deaths from flu." Last year over 61,000 deaths occurred in the U.S. arising from complications from the flu. I surmise when the history books are written, the extreme level of panic-driven narrative put forth around this outbreak will not be cast in a favorable light. It is right to be smart about one's activities, but overreacting and panicking is not a reasonable response in my view. The world is not coming to an end.

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