|Editor’s Note: This inclusive piece will be followed by a series of on-going reports documenting the coronavirus’ impact on lives, economies, and financial markets, specifically, asset classes to avoid and invest in, and include weekly updates on markets along with specific stock recommendations designed to protect and profit portfolios from the virus’ spreading impact, and what to invest in when the crisis recedes.|
The coronavirus is spreading globally, infecting and killing thousands of humans and decimating financial markets. This column documents the current state of the virus and financial markets to-date, and projects future impacts of the virus on mankind, global economies, and markets.
What Is Coronavirus?
Coronaviruses get their generic name from the corona or crown-like shape the viruses exhibit.
According to the U.S. Centers for Disease Control and Prevention (CDC), “Coronaviruses are a large family of viruses. Some cause illness in people, and others, such as canine and feline coronaviruses, only infect animals. Rarely, animal coronaviruses emerge to infect people and can spread between people.”
Zoonotic coronaviruses, as transmuting viruses are known, include Severe Acute Respiratory Syndrome, SARS (or SARS-CoV), which scientists believe originated in bats and was transmitted to civet cats, and Middle East Respiratory Syndrome, MERS (or MERS-CoV), scientists believe originated in camels.
The “novel coronavirus” (novel means new, as in not previously identified), or 2019-nCoV, (CoV is the CDC’s notation for coronavirus), or COVID-19 (where CO stands for corona, VI for virus, D for disease, and 19 for the year the virus was identified), the World Health Organization’s (WHO) official name for the novel coronavirus, is thought to have originated and transmuted as a zoonotic coronavirus from a live animal market in Wuhan City, Hubei Province, China.
Coronavirus and the Flu
The coronavirus and the influenza virus are not in the same family of viruses, though their impact on humans is similar.
Both COVID-19 and the flu affect the human respiratory system, first the upper respiratory system and more problematically the lower respiratory system, specifically the lungs.
One of the reasons the novel coronavirus isn’t as deadly as yearly influenza breakouts is COVID-19 mostly infects the throat. It’s when the virus makes its way through the respiratory system, to the lungs, that more serious complications begin.
Like the flu, the coronavirus manifests itself in symptoms including fever, coughing, shortness of breath, and, like the flu, can result in pneumonia, kidney failure, and death.
Both influenza viruses and coronaviruses are capable of “minor point mutations” that cause small changes in the virus’ structure, known as “antigenic drift.” Antigenic drift can occur relatively often and enables the coronavirus to evade CoV immune recognition, making COVID-19 sometimes hard to identify and potentially capable of mutating into variations of the current virus.
The greatest fear surrounding COVID-19 is the virus spreads faster and further, infection rates increase dramatically, and mortality rates spike.
Since the novel coronavirus is increasingly being compared to influenza viruses and the flu’s infection and mortality rates, it’s important to understand current and historic comparisons.
According to the CDC, the 2019 to 2020 flu season in the U.S., beginning October 1, 2019, as of February 1, 2020 estimates between 26 and 36 million people contracted the flu. As of January 31, 2020 (February figures come out next week), 180,000 people have been hospitalized and 10,000 have died from influenza complications.
Historically, since 2010, the CDC reports between nine million to 45 million people in the U.S. annually become infected with the flu. Between 140,000 and 810,000 annually are hospitalized. And deaths annually are between 12,000 and 61,000.
The Great Flu of 1918, which lasted 15 months, more commonly known as the Spanish Flu, according to Dr. Jeremy Brown, Director of the Office of Emergency Care and Research at the National Institutes of Health infected 500 million people worldwide and killed 50 million, 3% to 5% of the world’s population then.
Dr. Brown recently warned COVID-19, though not nearly as virulent as the Spanish Flu, could wreak havoc across the globe.
COVID-19, like the flu, is transmitted mainly by coughing, sneezing, possibly talking, and touching contaminated surfaces. Infection occurs through the mouth, nose, and eyes.
An analysis of 22 earlier flu-like viruses showed infections remain on inanimate surfaces for as long as nine days at room temperature. Scientists believe influenza and coronaviruses thrive in low temperature, low humidity conditions, which is why cases proliferate in the Northern Hemisphere during autumn and winter months.
But, COVID-19 is showing up in the Southern Hemisphere and equatorial countries too.
As of Saturday, February 29, 2020 at 20:35 GMT, government officials have acknowledged COVID-19 infections in several Southern Hemisphere countries including Australia, New Zealand, Indonesia, Brazil, and equatorial countries including Ecuador, Algeria, and Nigeria.
In the Northern Hemisphere, as of February 28, 2020, China acknowledges more than 78,000 people have been infected and more than 2,800 have died. South Korea has seen more than 3,150 infected and at least 17 deaths. Iran has reported over 1,000 cases and 48 deaths. Italy has seen over 1,000 cases and 29 deaths.
France, the United Kingdom, Turkey, Iraq, Pakistan, Lebanon, Kuwait, Taiwan, Thailand, a total of 55 countries, so far, have reported cases with many of them registering small numbers of deaths.
The United States saw its first two deaths from the virus this weekend. Cases are cropping up in Washington state, Oregon, California, Rhode Island, New York and are expected to spread to other states.
There is no vaccine for COVID-19.
The Impact of COVID-19 on Financial Markets To-Date
Global markets and U.S. equity markets, after posting all-time highs in mid-January 2020, started retreating on news out of China that Wuhan and other Chinese cities were being “quarantined” on account of spreading coronavirus infections and deaths.
On January 31, 2020 markets plunged, with the Dow Jones Industrials Average falling 603.41 points, or 2.1%, to close that Friday at 28,256.03.
But, news out of China on Monday that the rate of infections was slowing buoyed investors’ hopes the coronavirus crisis was under control and receding.
Within two weeks stocks rebounded.
The Dow, from its January 31, 2020 lows to mid-February, rose an astounding 1,312.54 points, or 4.6%, to post a new record high of 29,568.57 on Wednesday, February 12, 2020.
Then more negative news surfaced. The coronavirus was spreading to other countries and equities fell on Thursday and Friday.
On Saturday, February 15, 2020, Chinese officials revealed 15,152 new coronavirus infections and a one-day death toll of 254 from the epidemic.
U.S. markets tried to calm themselves the following week but couldn’t. More bad news, more infections in more countries, mounting infection rates and deaths outside China rattled investors on Thursday and led to a hard selloff on Friday, February 21, 2020.
Over the weekend traders began selling futures in Asia. Asian markets opened down big on Monday. European markets immediately followed suit. And by the time U.S. markets opened on Monday, February 24, 2020, sell orders were swamping brokerages and exchanges.
Globally, with emphasis on U.S. equity markets, stocks have been in virtual freefall since then.
Last week the Dow fell a shocking 3,583 points, just shy of a 12% drop, closing at 25,409.36. That’s a 4,159.21-point drop, or 14% fall from the index’s mid-February record high.
As far as “corrections,” when an index drops 10% from its highs, the Dow’s dramatic fall is its fastest correction in history.
The same is true for the S&P 500 which dropped 11.49% last week and the Nasdaq Composite, which also dropped 11.49% last week.
Investors in U.S. listed equity markets lost $2.8 trillion on the week and $4.6 trillion since February 19, 2020.
Selling wasn’t confined to U.S. equities.
Last week China’s Shanghai Composite fell 5.6%. Japan’s Nikkei dropped 3.37%. Australian and South Korean benchmark indexes both fell 3.3%. Germany’s DAX lost 3.9%. The London FTSE 100 shed 3.4%. And Italy’s FTSE MIB index dropped 3.6%.
The MSCI index, which tracks shares in many of the world’s biggest companies, has fallen 8.9% – its worst percentage decline since October 2008.
A total of $6 trillion of global market value was destroyed last week, according to S&P Dow Jones Indices senior analyst Howard Silverblatt.
Asian markets opened early Monday, March 2, 2020, mixed. U.S. futures pointed to a much lower open, bounced, sold back, and bounced around, trying to find a foothold. The “flight-to-quality” trade drove the U.S. Treasury 10-year note’s yield to 1.01%. And oil, a benchmark of global demand for commuting, manufacturing and mining, consumption and growth, measured in terms of U.S. WTI, West Texas Intermediate, fell 16% over the week to $44.76 by Friday.
Is this time different?
Equities and equity markets, often valued in terms of metrics like price-to-earnings ratios, price-to-sales ratios, discounted cash flow models, and by other absolute and relative measures, often fall or “correct” when investors fear they’ve exceeded any number of metrics and have become “overvalued.”
Whether stocks fall because company fundamentals appear overvalued, are demonstrably weakening, or stock prices breach technical indicators like declining through 50-day or 200-day moving averages, most selloffs and corrections are based on re-pricing relative to valuation metrics or price-movement trends.
And while stocks and equity markets in the U.S. and globally were, by most valuation methodologies and price-movement metrics, prone to some kind of selloff for weeks, or months, some analysts say quarters or years, prior to their mid-February slide, the free-fall markets experienced last week, and maybe prone to in the future are fundamentally different.
Different, as in “this time is different.”
Aside from company and consumer impacts that China and some Pacific-Rim countries felt in 2003 as a result of the SARS virus, globally, the world has never seen major cities, including economically important manufacturing cities like Wuhan, China and Milan and other economically important Italian cities in the country’s North, shut down.
Equity prices are falling because global commerce is being impacted to the point where companies have been shuttered, cities have been quarantined, countries’ institutions including schools in Japan are being closed, and consumers are losing confidence in governments’ abilities to stem the growing pandemic.
That’s what’s different this time.
U.S. equities opened meekly and managed a good, strong bounce. That’s where we are now. Will it last? Probably not. Not until the fear and panic over the spreading coronavirus pandemic are checked once and for all. Then, if it’s not checked soon, what’s next will be more chilling than what we’ve seen to date.
The Chinese economy will collapse, and the country’s incipient recession will become a depression.
Global economies and equity markets will suffer from that fallout.
U.S. equities will enter bear market territory, quickly posting more than 20% losses from their February highs, but will be the first to bounce higher as America, once again, becomes a global haven for capital and investment.
Interest rates will turn negative in more countries and the global value of government bonds with negative yields will exceed $20 trillion, double current levels.
Bonds prices will rally, and yields will collapse, eventually making bonds far more volatile than equities as a spike in short-term depreciation fears gives way to a burst of inflation.
Commodity prices are going to fluctuate wildly.
Gold will exceed $2,000 an ounce by the end of the second quarter, 25% higher than where it trades today.
Fortunes are going to be lost and made.
That’s what’s ahead.
I’ll be back with your roadmap in the coming days.