What started as lame jokes about a mediocre Mexican beer causing the flu has turned into a deadly serious world health crisis over the past several days. The Coronavirus is now an infectious global nightmare and a daily headline.
I’m still processing all the possible consequences of the viral pandemic now sweeping the globe. Part of me believes it’s just a contagious superbug, another part is concerned about the economic aftershocks from the containment effort.
And I gain no comfort from the cable news talking heads sensationalizing every new case nor Trump referring to the first US person to die as a “wonderful woman” when in fact it was a man.
As of Sunday, the worldwide infection statistics were still modest, with 85,000 confirmed cases and 2,900 deaths, but the infection rate is still accelerating and remains uncontained.
As hand sanitizer, water bottles and masks fly off store shelves, perspective is important to keep a level head about the Coronavirus. Through February, 18,000 US citizens had already died from the regular flu this winter, which kills 30,000 folks per year on average.
The Coronavirus death rate thus far is running about three-percent, which is much higher than the flu but not Ebola-like. For healthy people, the Coronavirus will likely be an inconvenient sickness more so than a serious health risk.
China, the host source of the novel Coronavirus, is the key cog in the world’s manufacturing supply chain. Now its economy is in the hospital under quarantine.
Modern corporations hold lean inventories and the interconnected global supply chain is becoming messy due to the wave of shuttered factories and mines in China over the past few weeks. It’s not a stretch to assess the world’s workshop has now temporarily closed for business
This health episode is also revealing about how important China has become in the global economy.
In 2003, when the China-based SARS virus created a pandemic scare, China only represented 4% of the world’s economy. Now it represents 20% and thus has caused legitimate worry should Coronavirus go viral, both inside and outside of China.
Consider that 15% of Apple’s revenues come from China! And get this: Proctor & Gamble purchases 17,600 materials manufactured in China for its stable of consumer products. Gulp.
To be blunt, the next several months of containment efforts will be crucial. If unchecked, the risk of a global economic recession will become real due to the ripple effects of sick workers and shuttered businesses.
The health impact has been to investor portfolios more so than their lungs. In the investment world, Coronavirus is considered a “black swan” event. A black swan is a sudden, rare and unpredictable event – sometimes financial, sometimes not – with often a substantial short-term adverse impact on capital markets. Two excellent examples of black swan events were 911 and the great market crash of 1987, during which the US stock market suddenly dropped over 20% in one trading session.
The Coronavirus will go down as a textbook black swan that has overwhelmed global stocks. It also derailed the US stock market’s climb to the stratosphere, at least temporarily.
After posting a record high on February 19th, the S&P500 fainted, falling over 12% last week. Again, for perspective, this is one of the worst all-time stock market weeks ever and the worst since October 2008.
Global stocks fared no better as the European market was down 12% and Japan fell 10%.
And the 10-year US Treasury note hit a 230-year old record low yield of 1.12% on Friday, retaining its status as the world’s true safe harbor investment.
What’s next?
The best approach is to view the next few months as a true test of existing systems around the world: medical, government, central banks and capital markets. Right now, investors are unsure if governments are up to the containment task and stocks have been unmercifully punished over the uncertainty.
Based on the damage done so far, world economic growth will in fact be impaired in 2020. Some analysts are forecasting zero US corporate earnings growth in 2020 predicated on the Coronavirus impact - as things stand now.
The risk of a near-term recession in the US and / or across the globe is certainly on the table if outbreak conditions worsen.
We get compensated to offer our opinion on these matters, so here’s our take. After their initial complacency, world governments are now taking the pandemic risk seriously and their rigorous containment mobilization efforts of late are encouraging. Competency in their efforts remains a concern, however.
As for US economic outlook, absent a true pandemic / mass quarantine scenario, we don’t see a recession in 2020 caused by a flu bug. The US consumer is still in a spending mindset due to the solid labor market, low interest rates, wage gains and robust housing market conditions.
In our view, most of the panic trading impact was logged last week. However, uncomfortable levels of stock market volatility have moved in for the foreseeable future until the Coronavirus crisis is resolved.
As Albert Einstein quipped, in the middle of every difficulty is opportunity. Now is not the time to rotate wholesale out of beaten down growth stock investments, but it could be a window to rotate out of bonds / cash into value stocks possessing good fundamentals, many of which got whacked last week out of proportion to growth stocks, that have been priced for perfection.
The episode underscores the value of quality active management. Unlike an index fund, a good active manager can sift through stocks less impacted by the global supply chain crisis and take advantage of peculiar opportunities like overweighting 3M, the world’s leading manufacturing of masks (too late now!).
Carrie and I are watching this situation closely but not making any life changes until things take an unexpected turn for the worse. In the meantime, turn off the TV and get outside more to lower your infection risk.
Until next time, be well….Tim