Perception versus Reality

Separating Perception from Reality after Today’s Market Losses

Did Newsom intentionally hit the panic button?

California Governor Gavin Newsom declared a state of emergency yesterday after the state reported its first fatality from the Coronavirus. “This emergency proclamation will help the state further prepare our communities and our health care system in the event it spreads more broadly,” Newsom said in a statement.

Is this a prudent move or an over-reaction? California reported sixteen deaths from the flu in the first ten days of the new year. No one declared a state of emergency over those losses. Of course, election season was still ramping up back then. Was Governor Newsom’s declaration timed to catch the spotlight already shining on his state after Super Tuesday?

Stock Futures decline after California Declaration

Futures for the S&P 500, Dow, Nasdaq, crude oil, gold, and 10-year treasury showed declines after Newsom’s declaration yesterday. European stocks have also been affected. The FTSE 100 dropped 2% by the closing bell, fueled by a 10% drop by steel maker EVRAZ (EVR.L) and a 5% drop by mining company Rio Tinto (RIO.L).

The losses wiped out previous gains on Wednesday attributed to Joe Biden’s resurgence to the front-runner position for Democratic nomination. Exit polls show that the former Vice-President’s moderate policies are more palatable for investors than Bernie Sander’s ultra-progressive approach. California was one of the five states Sanders won. Hmm …

Perception and Emotion drive Investor Behavior

Covid-19 is the real deal. There’s no denying that. It kills people, but it’s still not as deadly as the flu. We’ve been living with influenza for so long that we’ve become anesthetized to its effects, unless it directly affects one of our loved ones. If state governors declared a state of emergency for the flu, it’s unlikely that we’d see the same fear-based investor behavior we saw this week. Familiar foes, no matter how dangerous, just don’t scare us as much as a new threat will.

The (media fueled) public perception for a rising number of concerned citizens in the US and around the world is that we have an apocalyptic pandemic on our hands which will wipe out a significant portion of the human race. There’s no evidence to support that. 90,000 people are sick from Covid-19. Three thousand have died. According to the World Health Organization (WHO), flu-related illnesses kill anywhere from 240,000 to 650,000 people per year.

Is Covid-19 a “Black Swan” Event?

The term “black swan” for investors is a descriptor for a market-changing event that is completely outside of the norm. The volatility caused by the Coronavirus scare has been classified by some as being this decade’s black swan. To put that into perspective, the term was tossed around in 2008 after the housing crash and in 2001 immediately following 911.

Perception is personal. It can be affected by the media and world events, but ultimately, it’s up to you to view the world through your own lens. The reality is that we have a new disease out there. It’s deadly, but it’s not a world killer, and it won’t result in permanent financial losses for you. The market will rebound. It always does.

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