Coronavirus is a Black Swan

Two weeks ago, I asked whether the novel coronavirus was more like a geopolitical event or a “black swan,” an unpredictable, outlier event that can disrupt the normal functioning of markets. Thursday’s CNBC headlines were not encouraging: “…We have gone from a record close to a correction in ten days…” “…This is the worst week since the great financial crisis…” “…This is the fastest move from a high to a correction since World War II…” Given the recent stock market downturn and widespread disruption of the global supply chain, the verdict is in — the coronavirus is a black swan.

While the U.S. Federal Reserve is unlikely to respond quickly to the coronavirus threat, analysts expect other central banks to enact interest rate cuts; but cold water was thrown on that expectation when the Bank of Korea chose to not lower rates at its February meeting. Meanwhile, the virus continues to spread: South America, until now the lone region seemingly spared, just reported its first case. Reportedly, a northern Californian, who had no apparent contact trough travel or other explainable reasons, has contracted the virus.

The important question now is: how long will this last? There is indication that warm weather — spring is near — will have a weakening effect on the coronavirus as it does on its cousin the common flu. Contrary to popular belief, central banks have plenty of firepower to encourage spending and investing; in other words, the virus’ market impact could pass quickly.

Advisors, this is a time to trust in your plan: do not take rash actions during this extreme event. The good news is that investors have not lost money unless they act to close their positions. We all knew that bear markets, black swans, geopolitical events and volatility would happen with increasing frequency. If you have an inordinate amount of anxiety with your plan, then after the disruption has passed it may be a good time for self-reflection, and evaluation or adjustment of your risk control process.