The spread of COVID-19 continues to have a dramatic impact on lifestyles, economic activity, monetary and fiscal policy, and financial markets. For investors, it is important to maintain a disciplined approach in considering the implications of the virus.

There are essentially five issues that need to be examined in such an approach:
1. The progress of the disease and its trajectory
2. The economic impact of private and public measures to contain it
3. The actions of monetary and fiscal authorities to mitigate these effects
4. How markets have responded
5. A disciplined approach to investment decisions

COVID-19 Update
On the disease itself, the global numbers are, unfortunately, on roughly the same trajectory as a week ago. As of Sunday, March 15th, according to the World Health Organization, there were 72,469 confirmed cases outside of China, up 193% from a week earlier. The crude mortality rate, (measured as cumulative deaths divided by cumulative confirmed cases) was an alarmingly high 3.5%. 

If the disease were to continue to spread at the same pace and with the same mortality rate, it would have a devastating human toll. However, while the situation remains very grave, there are reasons to believe that both of these numbers will improve somewhat in the weeks ahead.

First, the true mortality rate is likely much below a simple calculation of the cumulative number of deaths divided by the cumulative number of confirmed cases. This is because there are very likely many more mild cases of the virus that have not been reported.

Second, some countries, and most notably South Korea, appear to be succeeding in halting the growth of the disease through widespread testing and social distancing. In the last week, the number of cases in South Korea rose just 14% and the crude mortality rate so far is just 0.9%—well below the 3.5% number reported so far for the world outside of China. The rest of the world is, belatedly, adopting these measures and this should both slow the spread of the disease and reduce its mortality rate.

Third, there may be some seasonality to the virus, as witnessed by lower reported case numbers in the southern hemisphere, and, whether there is or not, better treatments and an eventual vaccine should, in time, greatly reduce both the mortality rate associated with the disease and the pace at which it is spreading.   

The Economic Impact Of Social Distancing
Having said all of this, the world has woken up to the very real threat of COVID-19 and public and private responses have triggered a breathtaking array of changes in lifestyles. In the U.S., these changes have included the cancellation of major organized sports and entertainment events, dramatic declines in airline travel and hotel bookings, a complete halt in the cruise line industry, severe declines in visits to restaurants and bars, less severe declines in traffic at retailers other than grocery stores, the wholesale cancellation of industry conferences, and the closure of many schools and colleges.

The fact that this all occurred late in the first quarter, combined with surging sales of food and necessities, suggests a still solid first-quarter GDP number. However, it appears inevitable that the U.S. economy will enter recession in the second quarter and this recession could be quite severe in terms of its initial decline in GDP. In particular, reasonable assumptions on a decline in spending across the most impacted sectors of the economy could easily yield an annualized decline in real GDP of between 5% and 10% in the second quarter.

Thereafter, in a best-case scenario, social distancing achieves a sharp slowdown in the spread of the disease and new fatalities. This allows authorities to authorize a slow return to normality, albeit with strict social distancing guidelines. Even in this scenario, the knock-on effects of employment losses from a traumatic second quarter could well result in a further quarter of negative economic growth in the third quarter, meeting the unofficial definition of a recession. Thereafter, however, the economy could begin a slow recovery.

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