We had originally intended to keep unpacking December’s This One’s For Us newsletter and get into the superstitions and black magic of technical analysis...but things have taken a rather interesting turn in the last week, so let’s address the elephant - er, the bioengineered microscopic pathogen - that’s (probably) in the room. It’s not yet April, so we’ll try really hard to stick to facts...or at least what has been publicly admitted to.
Here’s what a pandemic looks like:
1 billion cases worldwide, somewhere between 10 million and 40 million of which are in the US (about 10% of the population). Deaths number 250,000 to over 500,000 globally, with 12,000 to 60,000 or so dead in the US. There is no cure, and you can get reinfected, so those numbers are per year. Every year, 12,000 - 60,000 dead in the US from an incurable disease.
Turns out, that pandemic is real and has a name. We call it “the flu”.
Here’s what COVID-19 looks like, as of February 26:
81,322 cases worldwide, 59 in the US. 2,770 deaths reported globally, 0 in the US. That’s roughly the same number as are killed by lightning in a given year.
Now, that’s not to minimize the potential threat of COVID-19, it’s just offering a little perspective. For a little of the opposite perspective, consider that the mortality rate of “the flu” is about 0.15%, while COVID-19 seems to be hovering around 2-3%. You’re seeing data fit exponential growth models really closely, so if you extrapolate out and COVID-19 becomes as widespread as the flu, you’re talking deaths in the millions. SARS was objectively deadlier, with a mortality rate of 9% or so, but wasn’t anywhere near as contagious as COVID-19. An incubation period of up to 27 days or more and contagious while asymptomatic and apparently (as of 2/28) able to be transmitted via dog saliva? Good luck getting that under control. COVID-19 has already infected almost 10 times as many people as SARS (even just based on the “official” numbers), and is not going to stop in the next week or two. So yeah, there is a very real threat there as well.
But you know what’s spreading even faster than COVID-19? Fear of COVID-19. This is not a commentary on what is or is not an appropriate response to a potential pandemic. This is simply an observation of what is - and what is is a combination of quarantine/shutdown. China quarantined entire cities. Something like 70 million people were under quarantine in late Jan/early Feb, and more than 700 million currently have some kind of travel restriction in place on them. And by quarantine, we mean quarantine. Like, rounding people up in the streets and sending them to “education centers” quarantine. Like, apartments have only one usable entry/exit and each household can send one person out once every three days quarantine. Like, banning the use of private cars and paying anyone who reports a neighbor breaking the quarantine quarantine.
Italy had less than a handful of coronavirus deaths when they put 11 cities on lockdown. Like, police patrols and 50,000 people not allowed to leave lockdown.
Conferences are being cancelled. Athletic events are being cancelled. Japan has asked all schools to close for a month. Factories are shutting down. There are whispers about a late-May deadline for getting the disease under control or needing to cancel the Summer Olympics. There are also whispers about a Bay Area outbreak that is currently unconfirmed because apparently California (one of three states reportedly prepared with testing kits) doesn’t have enough testing kits.
And the market just caught Fear of COVID-19 big time. Seemingly overnight, or at least over the weekend, sentiment in the market has changed from “another Asian outbreak that might reduce Q1 GDP” to “SHUT IT DOWN NOW!”
The Dow was down 1000 points on Monday, down 800 points on Tuesday, up 400 Wednesday!...but only temporarily, it actually closed down another 100, and as of this writing Thursday afternoon we’re down another 600 (ed. note - ended down 1200 Thursday and are down another 800 as of Friday afternoon). For those keeping score, call it down 15% in a week. That’s painful.
In fact, the market hasn’t seen these levels since...checks notes...October 2019. Which is a lifetime if you’re a dragonfly, but is in fact only...checks notes again...four months ago. Remember Q4 of 2018? Down 20% on the quarter? Remember the second week of February 2018 and the multiple 1000-pt down days that week? It’s okay if you don’t, the point is it was fine.
Is this fine as well? Well, yes and no. Big picture-wise yeah, this is fine. We’re not talking about Ebola. Small, market-focused picture-wise...hard to say. As we pointed out last month, central bank money printing won’t fix a virus, and the recent monetary easing announcements by various central banks haven’t done a thing to change the negative sentiment in the market.
In the same vein as extrapolating a 1-2-4-8-16-32 data point series into an exponential growth curve that will infect millions in a month, let’s do a quick extrapolation of negative market sentiment. 1 - Down 10% in a week; 2 - Break below the 200DMA (technical analysis!); 4 - Bay area and NYC outbreaks identified; quarantines begin in the US; 8 - Enter bear market territory, down 20%; 16 - Recession caused by factories temporarily closing and supply chain disruptions; 32 - Backdrop of recession and virus gets Bernie elected.
That’s a pretty grim scenario for markets. What’s the flip side? Well, Larry Kudlow and Steve Mnuchin are both on the new “virus taskforce” or whatever it is, so the flip side is that you get an absurdly accommodative economic policy coupled with a global slowing of the COVID-19 spread thanks to draconian quarantine methods. You don’t need the virus eradicated to make markets happy again, you really just need to show a slowing of new cases to get off this exponential growth trajectory. Then markets can price in the eventual vaccine that’s coming next year (there are currently about 20 different ones undergoing trials) and get back to being controlled by Fed policy...which in that scenario would likely be a massive dose of QE and tax cuts. After that second week in February 2018, markets went on to make all-time highers by late summer. After Q4 2018, markets went on to make all-time highers the next year. Could the same thing happen here? Sure, it could.
But we’ve been selling a bit this week and repositioning portfolios because we think the Fear of COVID-19 is going to get worse before it gets better. And until it does...if you print this newsletter out single-sided, a little string and a hole punch will get you four face masks! Which is four more than you can find at CVS these days.
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