By now, there is no doubt that the COVID-19 pandemic has been one of the most unexpected global shocks in recent history. At Baron, we have been closely monitoring developments since the outbreak in China. Since March 11, we instituted a mandatory firmwide work from home policy, following our well-established and tested business continuity plan. The plan focuses on maintaining the Firm’s ability to serve its clients and protect their assets in the event of a significant business disruption. Thus far, our policies and procedures have functioned as intended, and Baron has not experienced any business disruption as a result of the Coronavirus outbreak. For the time being, we are working from home in our sweatpants.
Along with the safety of our employees, we remain fully focused on our clients’ needs, the portfolios we manage, and the companies in which we have invested. Our investment strategy has not changed, and we continue to assess the long-term prospects and competitive advantages of our investments. Our research team is doubling down, talking to our companies every day to determine how the current crisis is affecting the businesses and their future growth opportunities.
A rare event like this global pandemic poses many unknowns for investors. No one can predict when it will be over, what the magnitude of the impact would be on the population and economy, what the best protective measures are, how long a recovery would take, what businesses would be most impacted. Our investment philosophy, however, is not based on predicting the near term.
Historical Perspective on Previous Pandemics
Over the past 100 years, there have been several pandemics with significant global consequences for the population, economy, and stock market. The table below broadly summarizes their impact and the U.S. stock market returns during their duration.
During each of the prior pandemics, there were other significant macroeconomic and or geopolitical events around the times of the pandemics which makes it difficult to attribute the market impact to a pandemic alone.
The worst market decline during a pandemic was 36.1% during the Hong Kong Flu in the late 60s, which killed around one million people worldwide. During the Spanish Flu of 1918-20, which infected a third of the world’s population and killed over 50 million people, the S&P 500 Index’s worst period was a 32.2% decline.
To put things in perspective, as of the date of this letter the reported cases of COVID-19 have been significantly fewer than in any of these pandemics. Without any effective testing or treatment, COVID-19 may infect many more people than the prior pandemics. We remain hopeful that this will not be the case.
Compared to previous pandemics, investors have already priced COVID-19 as one of the worst pandemics in the last century. With people being forced to stay home, many businesses in the U.S. and abroad have been brought to a halt.
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