How Should Investors React to the Coronavirus?

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t is now clear that the coronavirus has escaped the attempted containment by Chinese authorities and has spread around the world. According to the World Health Organization, there are 79,331 confirmed cases, of which 77,262 are in China and 2,069 are outside of China (as of February 24, 2020). The two largest country clusters are in South Korea (with 232) and Italy (with 64). And many of those numbers seem to be on the rise, with the Washington Post reporting on February 24 that there were 833 confirmed cases in South Korea and 53 confirmed cases in the U.S.

Market reaction

On Monday, global financial markets were down by 3 percent or more. Here in the U.S., they were down by almost 5 percent from their peaks. This drop is one of the largest in recent months, and it reflects the sudden apparent surge in cases over the weekend. Investors are clearly expecting more bad news—and rather than wait for it, they are selling.

Is selling the right thing to do? Probably not. Indeed, the virus could continue to spread and even get worse. But we do know a couple of things.

What we know

First, new cases in China seem to be leveling off, having peaked between January 23 and February 2. We can expect things to get worse in countries with new outbreaks, but steps can be taken to help control the virus—as has been shown in the origin country.

Second, countries have been applying the lessons learned from China to their own outbreaks, which should help contain their outbreaks. For example, the Centers for Disease Control and Prevention (CDC) reports 14 cases diagnosed in the U.S., as well as 39 cases in people repatriated here from China or the Diamond Princess cruise ship. Cases here appear well contained and under surveillance, which should help limit any spread. The same holds true in most of the developed countries.

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