As the new coronavirus expands across the globe, we want to provide our thoughts on its impact on health, the economy and investments.
Background and Context
Coronaviruses are a large group of viruses that cause illness ranging from common colds to severe respiratory diseases. The new coronavirus was identified after a large population in China developed cases of pneumonia in December of 2019. The World Health Organization (WHO) declared the outbreak a Public Health Emergency by the end of January. The virus has been named SARS-CoV-2 and the disease it causes has been named COVID-19.
The WHO and the U.S. Center for Disease Control and Preventions (CDC) both provide very transparent data about the virus (here and here), its health impact (here), how to protect yourself and minimize its spreading (here and here). FAQ s from WHO and CDC and a simple video explanation. Johns Hopkins provides aggregated live data here.
While this virus originated in China and was thought to be on track for limited exposure in other countries, within the last week cases outside of China have increased significantly. As of March 4, there are roughly 95,000 confirmed cases globally. 80,270 of those cases are in China and the rest (14,802 cases) are spread through 70+ other countries. The re-acceleration of cases and the global expansion has created significant concerns. We will address those concerns from the perspective of impact on health, the economy and finances.
Influenza viruses and other infectious diseases are not uncommon. We experienced an outbreak of SARS in 2003, MERS in 2012, and Ebola in 2014. In 2009, the H1N1 outbreak was classified as a pandemic, infected roughly 50 million globally and resulted in 12,469 deaths in the U.S. alone. Even the seasonal flu has significant impact resulting in deaths between 12,000 to 56,000 per year.
The risk of every influenza virus is a combination of death rate and contagion rate. The chart below (via New York Times) compares the current virus to those we have experienced in the past.
To put things in perspective:
- Despite the contagion rate being relatively similar to SARS, SARS was effectively limited to 8,000 cases in 26 countries. The new coronavirus has clearly not been handled as well.
- The new coronavirus infected many people initially through food markets in Wuhan, China and then spread to a wider population quickly in part because of China’s slow course of action.
- While China did not do well initially, it eventually quarantined a city of 46 million people to stop the virus from spreading.
- Cases in China are still rising, but the rate of new cases is trending down and there are areas of China that have been very affective in blocking new cases. This is good news as it implies that other countries can and should have better overall results than China.
- This difference between China and other countries applies to death rate as well. The rate of death in China is more than 3% but much lower in developed countries with strong healthcare systems.
- Death rates are also highly correlated to the age of those infected. Patients over 80 years old have a death rate closer to 15%, while those below 50 have a death rate below 0.5%.
- As of March 4, there are 148 cases in the U.S., many of which were infected oversees, repatriated back to our country, and quarantined. The overall spread of COVID-19 in the U.S. is small but could get much larger.
- While these data points may seem optimistic, there are areas of major concern including accuracy of testing, rate of contagion, uncertainty of transmission and current lack of vaccine. Things are likely to get worse before they get better.
In some ways, the impact on the global economy may be more significant than the long-term impact on health. The solution to this virus is quarantine and quarantine carries a cost. China’s manufacturing and consumption are down significantly. Travel is already restricted. Events are being cancelled.
For consumers, activities and purchases may be deferred or canceled. For workers, factories may be closed. For companies, reduced demand and disruption of the global supply chain may result in lost revenue and lower earnings. And while some companies will profit from this outbreak, there is no question that economic growth will be slower until this virus comes under control. However, slower does not mean negative and so far, GDP estimates for China, United States and the world are still positive.
Some of this slowdown will likely be temporary, resulting in pent-up demand down the road, but some is likely to be permanent. It is impossible to predict the depth and breadth of the economic impact overall, but the long-term trajectory of global growth should stay positive.
After hovering near record highs, stock markets around the world reacted very negatively to the expansion of COVID-19. Last week we saw 5 days of negative returns and tons of intra-day volatility. This week, we’ve had a significant recovery but the U.S. market (S&P 500) is still down roughly 4% YTD. Global markets have followed a similar path.
As we think about the impact this potential pandemic will have on investments, here are some things worth considering:
- In times of market volatility, it’s important to recognize that for every seller, there is a buyer. Last week the sellers were willing to “get out” at any price. Buyers were willing to step in and put money to work with some degree of long-term confidence.
- Markets don’t like uncertainty and they sometimes price in the worst-case scenarios. At this point, the biggest risk for investors may be missing the recovery once markets rebound.
- Bonds are doing their job. Investors build portfolios – from conservative to aggressive – with a combination of stocks and bonds. We don’t expect bonds to deliver high returns, but we do expect them to provide stability and safety to the portfolio, and they have. Bonds have been positive during this market decline.
- If you have a diversified portfolio that’s aligned with your long-term financial planning needs, a market decline like we just experienced is built into the equation and, while not ideal, is within expectations.
- That said, any market decline is a potential opportunity to rebalance the portfolio and harvest some tax losses. Investors should proactively review accounts to see how they can make the most of this correction and turn some lemons into lemonade.
China got it wrong, and other countries need to get it right for the impact of SARS-CoV-2 and COVID-19 to be managed and minimized. While this won’t be easy, it is possible. Even if things go poorly, as they did in 2009 with the H1N1 pandemic, the long-term should be positive. Pharmacy companies are working on potential vaccines. The CDC, WHO and other countries health systems have impressive resources and protocols and are prepared to deal with these issues until they are resolved, as they did with the Ebola virus only a few years back.
We are here if you have any questions.