Virus Visions Produce Stock Market Volatility And A Buying Opportunity

The Wall Street Journal has a perfectly timed article that explains why last week’s virus news, stock market drop and volatility rise create a buying opportunity.

Jason Zweig’s “Intelligent Investor” piece focuses on issues like climate change, but the key points apply equally to the China virus news and the resulting visions of a possible pandemic.

Could the worst case happen? Yes, but, as the article points out, such disastrous fears often bubble to the surface quickly, without factual support, then peter out as efforts counter effects, explanations moderate fears and the trend begins to reverse. Underscoring the point, Zweig concludes his article with a quote from Laurence B. Siegel (Gary P. Brinson director of research at the CFA Institute Research Foundation): “Apocalyptic thinking has always been wrong as a forecast, and it will continue to be wrong.”

“Virus risk” at this point is built upon what is not known – yet

First — What is this new virus? How does it spread? What are the symptoms? What is the pattern of the illness? How can it be contained and conquered? How can its return in the future be prevented?

Second – Who has it now? Where are they? How are they being treated? How are they progressing?

Third – What is the mortality rate? This question highlights the key issue in Zweig’s article. Namely, how might our existence be terminated by what is happening?

Fourth — Will the authorities do the right thing? Will they pursue the cause? Will they accept what the scientists find and recommend? Will they provide transparency, letting the public know what is happening? Will they implement the “cure,” whatever that might mean?

Note: The questions in #4 are not a product of today’s political environment only. They have been important throughout modern history (for example, think Chernobyl, AIDS and cigarettes). Other issues and forces can get in the way and upend what logic and common sense would recommend.

Clearly, answering these questions will reduce the current uncertainties and, so long as the answers aren’t similar to those in a disaster movie, the dire visions will diminish.

The silver lining

Because investors (and the media) gravitate toward dire possibilities, stock prices sag, creating a buying opportunity.  The negative effect of the breaking news reports is visible in the S&P 500 chart, using 30-minute trading segments. Last week ended with Friday’s index rise and decline causing volatility to rise.

Here is the same price chart for the Dow Jones Industrial Average:

In such volatile times, it is good to maintain a calmer perspective by viewing a longer-term picture. Examining weekly results starting with 2018 reminds us of both the lengthy foundation building and the still-intact, recent breakout run.

The bottom line

When negative conditions beget scary visions, the stock market sinks as investors stop buying or start selling. Adding to the pandemic concern surrounding today’s new virus are the numerous questions that add a large dose of uncertainty.

However, the lack of information today does not mean that tomorrow’s findings will be terrible. Similar to previous virus attacks, this one likely will be identified, understood and controlled. If so, a selloff now will be viewed later as a buying opportunity.