The Only Pandemic Is Fear – But I’m Still Selling

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Financial markets have an impressive ability to discount (or predict) major events days in advance.


For example, think of the market declines leading up to 9/11–the S&P 500 declined 7.79% over the ten trading days prior.  NOW, over the past five trading days, the S&P 500 has declined 12%, as market chatter is focused on Coronavirus cases outside China spiking up.
 
The Market changed this week, IMHO, for a couple other reasons besides the developing COVID-19 story:
 

  1. the US economy & some economic notes out of China
  2. President Trump’s press conference on COVID-19 on Wed night

 
President Trump’s press conference was a strange spectacle – with nine senior people on stage as the President disclosed the ‘Coronavirus Task Force’ will be headed by Vice President Pence and will receive billions in initial funding. 
 
This did not jive with their message that ‘risks were extremely low’ and there are ‘just 15 cases in the U.S.’ (plus 45 from the Diamond Princess cruise ship).  Even more alarming was the fact that several times President Trump referred to meetings with experts being brought in tomorrow for discussions. 
 
Now, just prior to President Trump’s press conference it was announced a California person had tested positive for COVID-19 despite having no recent travel history and no known exposure to the virus, marking the first ‘community exposure’ in the United States.
 
So it is now quite likely the Coronavirus (now called COVID-19) is spreading unchecked among the general population in California. 
 
While warm weather and the likely small exposed population to date will keep infection totals low initially, each new case will weigh heavily on financial markets and a critical mass of 20, 50 or perhaps 100 cases could result in exponential case growth and possible hysteria – and that appears to be triggering a massive equity selloff. 
 
If this week’s new case was in fact a ‘community exposure’ infection, others in contact with the same carrier will likely test positive shortly (quite possibly resulting in several new cases by Monday) with a further wave of infections (spread by those infected by the initial carrier) beginning a week from now. 
 
These will be very damaging headlines – particularly given markets hate uncertainty more than bad news.
 
An early indication of the likelihood of the spread of the Coronavirus in the U.S. will come from the number of people being tested, which is reported daily by the Atlanta based Center for Disease Control (CDC):  If those with newly-confirmed infections travelled, worked with or interacted with a large number of people, expect a surge in the number of people being tested after each new case. 
 
You can keep up to date on this number at http://bit.ly/CDC-Covid19-count . As of the latest update—4:00 PM on February 25th (as reported February 26th)—445 people had been tested in the U.S. resulting in 14 confirmed cases. 
 


CORONAVIRUS HITTING JUST AS US ECONOMY SLOWING
 

 
This is happening just as the US economy appeared ripe for a slowdown.  Higher wages and a tight labour market have been saying for months that the US economy was traveling full tilt. 
 
That means we are going to have a regular business cycle folks!  And after euphoria comes stagflation–which we have been in for a year, despite rising stock market–and then (now!) recession.
 
US industrial capacity utilization has been declining for over a year and preliminary Q4 19 GDP data shows durable goods purchases continue to slow (from contributing 1.74% to Q2 Real GDP growth before declining to 1.09% in Q3 and .26% in Q4) while non-residential fixed investment has declined for three consecutive quarters – a streak typical of recessions which has not occurred since 2009.
 
The virtual halt of economic activity throughout much of China should be quite deflationary – a big plunge in commodity prices has already taken place.  And the same thing that has happened in the US–rising stock market despite flat to negative economic numbers-has been happening in China.  Forbes reported a week ago that car sales are down 90% in Beijing, and subway traffic in China’s capital city is also down 90%–yet the market in February kept going up (until a few days ago).
 
The global impact of the unprecedented loss of demand from Chinese consumers will only increase deflationary pressures while supply chain disruptions dampen already-fragile business sentiment in the United States and Europe.
 

 
Is Coronavirus Simply a New Influenza Strain?  

 

Probably…  Does That Matter Now?  No…
 

 
Coronavirus (COVID-19) may not be any more lethal than traditional influenza:  The 3,527 confirmed cases outside of China and Iran have resulted in 37 deaths to date (1.04%) while a lagged model shows a 2.14% fatality rate (current mortality versus confirmed cases six days prior). 
 
These statistics most certainly overstate the fatality rate as not everyone who contracts COVID-19 is tested as many remain asymptomatic (particularly children, who rarely show symptoms). 
 
If roughly half of individuals infected with Coronavirus do not receive laboratory confirmation, the fatality rate is quite likely within the .3% to .8% range typical of common influenza.  In the case of the Diamond Princess cruise ship, Japan’s Ministry of Health reported last week that 322 of 621 confirmed COVID-19 cases were asymptomatic.
 
The roughly 3,700 passengers trapped aboard the Diamond Princess for nearly a month are an interesting case study:  The vast majority of passengers have been tested for COVID-19 (3,011 as-of February 19th) and 705 have tested positive to date. 
 
While this could indicate a high infection rate (almost double the typical 10% general population infection rate for severe common influenza outbreaks), cruise ships have a reputation for spreading illness among passengers and the quarantine protocols employed appear to have been anemic (if not moronic) – passengers were allowed to roam the vessel and were served meals from buffets!!!
 
More importantly, the Diamond Princess passengers likely represent the most thoroughly tested population exposed to COVID-19 in the world, making their fatality rate more relevant than anything else we have to look at now. 
 
To date, four passengers have died (.57%) – all of Asian descent (there are  anecdotal reports non-Asians are less severely impacted) and all over eighty years old.  Keep in mind that the average age of cruise ship passengers tends to be close to 50 while Princess lines have an even older demographic.  That means the fatality rate should be higher than that of the general population (i.e. the general population fatality rate should be lower than 0.57%).
 


CONCLUSION–I DON’T CARE WHAT I THINK


 
One of my market mantras is—I don’t care what I think.  I gauge the overall market; what does the majority think.  While I am not fearful that COVID-19 will be a globally lethal pandemic a la Spanish flu in 1918, millions of people are!
 
For equity markets, only perceptions matter and thus the Coronavirus is extremely deadly, even if it isn’t.  So I expect continued volatility, and I’m at 80% cash with most of my equity in gold stocks.