Should you Panic – CoronaVirus

Coronavirus is said to have been transmitted from Bats to humans first. Today, it has spread from humans to stock markets as markets around the world tumble on the likely economic impact of the Virus that currently doesn’t seem to have any known cure.

Panic happens when we have inadequate information and coronavirus is one such case. On one hand, there will be an impact when an economy such as China more or less shuts down even partially. On the other hand, how should we act is a question that props up.

Let’s start with the worst case scenarios taking the idea from thousands of fictional novels and hundreds of movies which have dystopian futures as the key element of the plot. 99% of humankind is wiped out and the survivors fight back.

If that is to be the case, should you sell everything and buy Gold (which is rocketing currently). The answer of course is Nope for what use is Gold when it cannot protect your life or the ones of your loved ones. Heck, it may actually turn out to be a liability given the ease at which it can be stolen.

Should you Sell everything, convert your fixed assets to cash and wait to see how this pans out? Seems like a great idea, but like in Gold, this has a draw-back. What happens when there is a cry of Fire in a crowded theatre? A stampede.

If things go really bad, the first thing to shoot up would be Inflation as everyone wishes to stock up. While having cash may help you in the first phase, as prices keep going up, your money in the Bank like the Zimbabwean Dollar becomes a worthless currency.

Most conspiracy sites quote the “Spanish Flu” as bearing resemblance in terms of spread and hence in terms of damage. The difference in my opinion though is that unlike 100 years ago, we have much better knowledge and much better infrastructure to treat those who have been infected.

But since our focus is on markets, let’s look at its impact on markets. The Spanish flu killed Millions worldwide including an estimated 5% of India’s population at that point of time (Link). In the United States, 28% of the population of 105 million became infected, and 500,000 to 675,000 died (0.48 to 0.64 percent of the population). 

Since we have US Dow data of those times, it’s pertinent that we visit them to see how badly it impacted them. The key here is understand the Risks that may be out there and try to prepare for them rather than panicking like everyone else.

Do note that the period of time was also the same period when World War I was finally coming to a close and hence there would have been overlapping factors at play.

If you were to start when the Spanish Flu first erupted till when it halted, the Dow actually was higher than where it had started. Do note that for the Dow 1917 was a bad year and 1920 turned out to be another bad year (down 30%). Post that though, Dow shot up 400% in the coming years until the crash that brought upon the Great Depression.

I don’t believe that now is the time to dump stocks and move to cash. Instead, if the crash continues, I would rather be adding for its only in hindsight we recognize good opportunities.

Nifty 50 has not seen a fall in a long time even as the economic situation has deteriorated around. Not surprisingly just 2 days of fall seems to be creating some amount of panic when the truth is that only today the index closed slightly below its 200 day EMA

Before the financial crisis, Indian markets like a clock easily slid down 20% from its 200 day EMA literally every alternate year. Post 2008, we are yet to see one such move.

It’s important that you have a plan of action for having a plan in advance avoids panicking and behaving like the rest of the herd. If you strongly feel that markets may melt down, it’s not wrong to exit and reduce the risk exposure even now.

If you think that even this shall pass and are comfortable with the current asset allocation, moving higher or lower based on market triggers is the right approach. 

Do note that as Equity markets fall, so shall your exposure to markets even without you having to do anything (as total percentage). 

Every time markets fall, it seems that the world as we know is ending and everytime we are in for a disappointment as it did not end. If the world does end due to this virus, I doubt you shall complain to me that I was wrong, if it doesn’t hopefully this post would have given you an ability to create a framework on how you shall deal with this crisis – both financially and personally.