The FTSE 100 is down today as are stock markets in Germany, Italy, Spain, and France. In the US, the futures market points to a lower opening for the S&P 500.
Markets in Europe and the US had, until recently, barely registered the novel coronavirus that broke out in China in December 2019. It took a profit warning from Apple, whose iPhones are both produced and purchased in high numbers in China, to get a reaction.
The rate at which new cases of COVID-19, the disease caused by the coronavirus, are being reported in China appears to be falling. The peak number of new cases per day in Hubei, the epicentre of the outbreak, was 3,458, and occurred around 17 February. Now, around 712 new cases are recorded each day.
While there are signs that the outbreak has peaked in China, multiple other countries are reporting COVID-19 cases at an increasing rate. Fears of a global pandemic have hit the markets in earnest now.
If you look at the top fallers in the FTSE 100 today, it’s airlines and travel companies in the top three, but other industries and sectors are feeling the effects.
Markets are falling because people are changing their behaviour, or having it changed for them. Stocks are assets. The prices of assets fall as the present values of their expected cash flows shrink. As an example, airlines and travel companies generate smaller cash flows when people are not travelling as much as normal.
Until the rate of new daily cases outside China starts to level off, I am expecting continued volatility in the FTSE 100. Because so many FTSE 100 firms have international revenues tied to the global economy, the effects of the outbreak will linger on in the quarterly, half-yearly, and annual reports of companies.
Patience and faith
Today, my portfolio is down. What have I done about it? Nothing.
But don’t listen to me – listen to Warren Buffett who views stocks as part ownership in businesses. Today, in an interview with CNBC, Buffett reminded listeners not to “Buy or sell your business on today’s headlines“.
Yes, the coronavirus will affect the global economy. Yes, the UK stock markets are down and they may fall more, but I have complete confidence they will recover. What I nor anyone else can predict is when.
For a long-term investor with a diverse portfolio of quality companies, that have the financial strength to continue through bad times, what will selling now achieve, other than a capital loss? If the company pays dividends, the investor loses out on income also.
If a company’s fundamentals look good for the next five, 10, or 20 years, and the dividend yield looks attractive right now, should someone invest now? After all, the price could fall further. But nobody can know for sure. What is true is that the shares of some quality UK companies are cheaper now than they were last week.
Long-term investors should ignore the headlines and the right now, and focus on the future. The longer the timeframe, the surer I am that the coronavirus will have been defeated.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.