The coronavirus drove the 3,600 point drop in the Stock Market this week, but it wasn’t the actual effect on the virus, but the fear of its effect that drove the plunge.

As in the case of infection where the body’s response to the infection in the form of fever is often more painful than the infection itself, the same holds true for epidemics and the economy.

The panic and overreaction are often more harmful than the actual tangible effect of the disease on the economy.

Even as the actual impact of the coronavirus on the U.S. economy so far has had a far less measurable effect on productivity and revenue than the more than 10% drop in the Dow would suggest, cooler heads have not prevailed.

Driven by social media and the 24-hour news cycle is keen on stirring up panic and hysteria, the stock market has experienced unprecedented volatility and unpredictability. This is even as the market had hit record high after record high in the past year leading up to this week.

This week’s Stock Market plunge highlights the essential problem with the market – that being its susceptibility to huge swings in value owing to its liquidity. It’s this liquidity that indulges compulsive investor behavior in buying and selling on a whim based on nothing but rumor and conjecture.

The rise of social media has only added to this market combustibility, where panic and hysteria spreads like digital wildfire, where perception is never in line with reality.

Now more than ever, it seems the effect on an investment portfolio can be exaggerated way beyond reality due to the talking heads on cable news and social media.

As with socio-political crises, epidemics like the coronavirus generate widespread uncertainty invoking panic. This causes investors to respond by reducing their exposure to the panic by liquidating their holding – amplifying economic impact way beyond reality.

To illustrate the market’s tendency to overreact, one needs to only look at raw data. Based on human impact alone, the coronavirus shouldn’t invoke the type of panic that has gripped the global economy.

As of Monday, it had killed 2,618 people, mostly in China, where the rate of new infections appears to have peaked. By comparison, the Sichuan earthquake in May 2008 killed 69,000 or more without leaving any noticeable trace on the Chinese economy.

In the U.S. alone, the flu has already caused an estimated 26 million illnesses, 250,000 hospitalizations, and 14,000 deaths this season, according to the Centers for Disease Control and Prevention (CDC).

So why doesn’t the flu cause annual panics on Wall Street?

It’s probably because the flu is a known commodity. Scientists have studied seasonal flu patterns for decades. So, despite the high annual death toll, the fact that we know a lot about flu viruses and what to expect each season prevents annual selloffs in the market.

Uncertainty is what’s driving coronavirus fear and fear-mongering. Nobody quite understands the full potential effect of the coronavirus on world economies until it runs its course.

In the meantime, analysts and so-called experts will make outlandish estimates causing investors to overreact to shield themselves from heavy losses – helped in no small part by the news and social media.

Citigroup analysts summed it all up pretty well:

“Fear of the virus is spreading throughout the country, at a much faster rate than the virus itself.”

What this week’s drop in the market can teach us is that there is something fundamentally different about the markets compared to the days before the rise of social media and instant news, resulting in a significant change in economic fundamentals and a significant increase in ‘risk’ to the fundamentals.

In other words, the market seems to be playing by its own rules now. The results are what we see playing out in the markets right now in response to the coronavirus threat – exaggerated movements in one direction that could potentially swing wildly in the other direction due to optimism or new talking points dispersed through the news and social media.

The point of this discussion is that your portfolio is susceptible to the maddening crowd like never before. If the more than 10% drop in the stock market this week isn’t enough to convince you, maybe wilder swings in the future may.

The only way to stop your portfolio from this roller coaster ride is to get off the roller coaster just like an effective way to avoid an epidemic is to avoid countries where the epidemic is found. Similarly, to avoid Wall Street volatility, don’t play the game.

There are alternative investments that are uncorrelated to Wall Street that has proven to not only provide above-market returns but are shielded from Wall Street volatility.

Sophisticated investors have relied on these alternative investments for decades to avoid market hysteria of the type we’ve seen this week.

Invest like the ultra-wealthy. Invest in income-producing assets. Find out about our non-Wall Street options today.

Andrew Lanoie