Black Swan or Buying Opportunity?

March 6, 2020

More than two months has now passed since China first alerted the World Health Organization of several flu-like cases in Wuhan, the capital of Central China’s Hubei province.  With nearly 100,000 confirmed cases and more than 3,000 deaths, the new coronavirus has spread faster and claimed more lives than the 2002 SARS outbreak.  The virus has spread to at least 70 countries, including the United States, forcing businesses to close, airlines to ground flights, and worried people to shutter themselves indoors.

While this is first and foremost a human crisis, it’s also difficult to ignore the virus’s impact on economic activity.  The toll on global financial markets has been pronounced, with travel-related and oil stocks leading markets lower.  Just how big of an impact the outbreak will have on the global economy is still to be seen, but many are already considering this a “black swan event” – a rare and unforeseeable event with severe consequences.

Wuhan, with a population greater than that of New York City, is a key transport and manufacturing hub for central China.  With the city essentially on lockdown, companies that rely on Wuhan for manufacturing have been forced to consider alternative suppliers as widespread quarantines and factory-closures have disrupted their supply chains.  Apple, for example, which generates about 15% of its revenue from China and manufactures many of its products there, has announced that they do not expect to meet second-quarter financial guidance as factory shutdowns have slowed or halted much of their production.

United Airlines, which has suspended its US-China flights, recently rescinded its 2020 revenue guidance, stating that “the range of possible scenarios is too wide to provide earnings guidance at this time.”  It is exactly this type of uncertainty that is most to blame for recent market volatility.  While many speculate about the Coronavirus’s impact on GDP growth, the reality is that nobody really knows how severe the crisis will become or what impact it will ultimately have on the economy.

While President Trump has cast the coronavirus as “a problem that’s going to go away,” the CDC recently warned that they are now expecting a wider spread of the virus in the U.S. and are preparing for a potential pandemic.  Until the coronavirus is contained, contrasting statements like these will continue to whipsaw stocks and send investors in search of safer havens.

In times like these, it can be unnerving to witness such sharp stock declines.  While the fear and uncertainty surrounding the coronavirus outbreak are understandable, it’s also important to keep emotions in check.   It is our job, as your investment manager, to monitor the situation and its potential impact on the companies we own without letting emotion drive our investment decisions.  By sticking with a disciplined approach, we can try to use uncertainty to our advantage.   More importantly though, we believe the coronavirus outbreak should serve as a reminder that life is unpredictable.  While the heightened volatility may present us with some opportunities, above all else, we hope the virus is quickly contained and future loss of life is limited.

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