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Impact of the Coronavirus
Concern over the Coronavirus hit financial markets driving both the Dow Jones Industrial Average and the S&P 500 indexes down more than 3%. From a personal and medical perspective, the Coronavirus is serious, we do not believe it will be as serious economically as the market reaction seems to imply. Instead, we believe the sell-off has been prompted by fear of what is not known, rather than what we do know. Some perspective is in order – both personally and economically.
On a personal level, this is a human tragedy, and we would never attempt to minimize that. We are saddened by both, and our prayers extend to those who are suffering and to the families who have lost loved ones to this disease. But we also are saddened by the losses incurred each flu season, or by those which attend other diseases.
As of this writing, there are 80,088 confirmed cases of Coronavirus and 2,699 deaths. By contrast, thus far in the 2019-2020 flu season, the “regular” flu has infected 15 million people, putting 140,000 of them into the hospital, and killing 8,200 of them. The United States Centers for Disease Control and Prevention tells us that the 2018 flu season killed 80,000 Americans. Again, every one of these is a tragedy, but the Coronavirus appears different – less fearful – in the context of our historical experience.
Fear vs. Reality
Unfortunately, too many press reports have induced fear. We’re told Coronavirus is deadly, but so is every other virus. We are told this virus is very contagious, but so is influenza. Reports say that it spreads from human to human, but so does every other contagious disease. We’ve been told its “new”, but so were swine flu and SARS. Lastly, we’re told this virus could mutate, but other viruses mutate, and most viruses mutate to become less deadly to preserve the host and therefore the life of the virus in that host body.
Reality must be viewed from the perspective of whether this disease is significantly more deadly than other outbreaks which we endure on a normal basis. We believe the evidence indicates that this disease is not worthy of this level of fear or panic. And there may already be good news in the wings.
According to Worldometer, which compiles health statistics across the world, the total active cases have already peaked almost one week ago at 58,747, and the number of active cases since then has been declining. Even with the new cases just reported in South Korea, Italy and Iran, there are 49,923 active cases, a decrease of 15% from the peak.
The news coming out of China is likely to still be bad, and show more deaths per capita than elsewhere, because of the vastly inferior healthcare system there. But where healthcare systems are vibrant, the data does not seem to support a doomsday scenario. The death rate inside china is very high, but outside China is estimated at 1%, and there is already a drug to combat the virus, which is quickly moving toward clinical trials. This drug’s development took less than four months, as opposed to the 20 months it took for the development of a SARS drug in 2003.
Economic Impact of the Coronavirus
From an economic perspective, the issue is how this will impact the U.S. economy. From everything we see, the Coronavirus has not changed our positive opinion of economic prospects. We started 2020 with a sound and growing economy, and we still anticipate the continuation of both.
Most of the impact of the Coronavirus will be felt in the second quarter. Capital goods exports to China and imports from China will be decreased due to difficulties in reopening factories that have been closed to limit the spread of the disease. Accordingly, inventories in the U.S. will be depleted faster than normal, but when the disease has burned itself out, inventories will be expanded faster than normal in the second half of the year in order to attain needed levels. There may also be some realignment of supply chains, but this only means that factories in some countries will lose customers, while factories in other countries will gain customers. The total number of customers and orders will return to normal levels.
Revenues and earnings from companies that are highly integrated with China will be affected, but here again, the decreases in the next several months should be offset by rebounding gains in the last half of the year. Some of this may even be mitigated due to the supply chain shifts already prompted by the Trump tariffs. Many companies had already begun re-sourcing supply from China to elsewhere.
We still see strong U.S. employment and consumer confidence. Nothing about this virus thus far suggests that we will see significant disruption to either employment or consumer purchasing levels in the U.S. Workloads and purchasing will shift – as they have with all past virus outbreaks – but sick days and delayed purchasing now will translate into overtime and higher purchases later. Normalcy will return; it may just be a little later than it has in the past.
Finally, let’s consider what has happened in the stock markets during the past virus outbreaks. The S&P fell 12% with the SARS outbreak, and the Zika virus outbreak prompted a 12% fallback. In both cases, the economy continued on, the markets recovered, and new sustained high levels were attained.
Looking Towards the Future
In summary, ours is a mixed message. There is sadness for those who are afflicted with this illness or who bear the burden of losing loved ones, but there is also optimism that this season will pass, as all others have, and that the vibrancy of the economy will continue. The chart illustrates this point well. It compiles all of the major disease outbreaks and their effect on the market from 1957 to 2016. To date, the Coronavirus has killed less than 3,000 people. Comparing that to the Ebola outbreak in 2014, which killed around 11,000 people, we can see that the Coronavirus is nowhere near as serious. More importantly, after every single one of these disease outbreaks we can see that the markets did in fact recover. The Coronavirus is no different. The markets will recover.
It should, therefore, come as no surprise that we are not recommending any strategic changes.