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Good evening,

Unless you've been in a coma this past week, you're probably well aware of the spread of the novel Coronavirus, its health threat and its devastating effect on the financial markets.  It is understandably concerning and perhaps even scary, so this message aims to put things in perspective.

The virus itself undoubtedly presents a global health threat, but it's not necessarily its mortality rate that is causing so much anxiety.  The CDC estimates that between 18,000 and 46,000 people died in the US in the past five months from the flu!  You don't see that in the headlines, and people make no changes to their normal lives because of it. Its the uncertainty of the novel virus that drives the anxiety and the fear. The uncertainty around what causes it, how it spreads, what are the symptoms, how it progresses, who is more vulnerable, and when a vaccine might be available.  The Wall Street Journal published a good article to help answer some of those questions as well as some basic personal precautions you could be taking.

Now, the financial markets - US equities, in particular - have largely ignored the threat up until about ten days ago.  Since then, the markets went from euphoria to panic without skipping a beat, as they just wrapped up the worst week since the 2008 financial crisis.  The problem, again, is uncertainty.  Uncertainty about the spread of the disease, to be sure, but that's not the only consideration.  The interactive map maintained by Johns Hopkins University shows the recent surge in new cases outside of mainland China.  This spread creates uncertainty about possible disruption of lives around the world, including basic economic activities and travel.  That adds to the economic consequences of the global supply chain disruption coming from China.  If you hadn't had a chance to read our last month's newsletter, the Question of the Month deals specifically with the economic and market-related questions in connection with the virus.

Markets always tend to overreact in the short term, in both directions.  This is even more evident in the case of so-called "black swans" - events that could not have been predicted and have significant, but unknowable global consequences.  The extent of the economic fallout won't be known for months, even after the health effect can be measured.  But barring the absolute catastrophe, the long-term economic picture could still be good.  If anything, some promises by the central banks to intervene with interest rate cuts and another incentives could help calm the markets down.  That's a standard market medicine (excuse the pun) for black swans like natural disasters and financial crises.  The market volatility in the near term will remain, but diligent long-term investors with correct hedges should stay the course.

I'm here if you have any follow-up questions.

Stay safe and have a good weekend,

Igor Tsukerman.

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