It should, of course, first be recognized that, for some families around the world today and, sadly probably many more in the months ahead, issues of economics, politics and finance will be but a small footnote to personal tragedy. That being said, after a historic tumble in stock prices and interest rates last week, investors in the week ahead will be trying to assess what the coronavirus outbreak means for their investments.

Such an assessment should begin by looking at the disease itself and considering the difficult questions of its potential human toll and how quickly it can be contained. Then it is important to consider how both personal decisions and governmental restrictions in reaction to the virus could impact the global economy. Another key issue will be the monetary and fiscal policy response both here in the United States and around the world. Political considerations may also be important, as the fallout from the virus has the potential to impact the November election and any subsequent policy changes. Finally, investors will be keenly interested in when the stock market might be expected to hit bottom and begin to recover. 

On this last question, however, it is crucial to focus on valuations and recognize that the value of long-term assets depends on long-term economic performance. 2020 may be the year of the virus but the value of bonds and particularly stocks depends only to a small extent on current year and much more on what happens in the years and decades ahead. The most important question in personal investing is never “when” but rather “what,” and investors should consider whether their portfolios are constructed both to weather the problems of 2020 but also to benefit from an inevitable rebound as the calendar moves forward.

First, on the disease itself.

As of February 29th, according to the World Health Organization (Source: Situation report—40, Coronavirus disease 2019 [COVID-19]— 29th February 2020, World Health Organization), there have been over 85,000 cases of the Covid-19 virus confirmed worldwide. Of these, roughly 79,000 have occurred in China and 6,000 elsewhere. 

It is too early for health authorities to precisely estimate the overall mortality rate from the disease. However, it is notable, even in the early stages of the outbreak, that the disease appears to be far more deadly for older people, particularly those with some other underlying ailment such as heart disease or respiratory problems. A Chinese study published on February 11th looking at over 44,000 confirmed cases of COVID-19, showed a crude mortality rate of 0.2% for those under the age of 40, 0.9% for those aged 40 to 59 and 6.0% for those over the age of 60 (Source: The Epidemiological Characteristics of an Outbreak of the 2019 Novel Coronavirus Diseases [COVID-19]—China CCDC, February 17 2020). 

To put this in perspective, the coronavirus is clearly more lethal than a typical influenza outbreak, which has a mortality rate of less than 0.1%. However, it appears to be much less lethal than some other recent viruses such as Ebola, which killed roughly 90% of those infected, SARS which had a mortality rate of 11% or even the huge Spanish Flu pandemic of 1918, which killed 2.5% of those who contracted it.

It is also too soon for authorities to tell precisely how contagious the virus is. However, the World Health Organization has issued a preliminary assessment that the average person with COVID-19 can infect between 1.4 and 2.5 others, making it more contagious than, for example, most forms of influenza (Source: Statement on the meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus [2019-nCoV], World Health Organization). Because of a long incubation period, the possibility of asymptomatic transmission, and the mildness of symptoms for many of those who come down with the disease, it appears likely that total cases will increase rapidly in the weeks ahead. One key unknown is whether this virus will fade in the spring as is often the case with viruses. However, even if this did occur in the northern hemisphere, the global nature of the spread of the disease suggests that it may become a more permanent global threat.

Finally, the medical community around the world is racing to produce a vaccine. While technology in this area has improved dramatically in recent years, any vaccines produced will have to be tested for safety and effectiveness, may have to battle future mutations in the virus itself, and would need to be manufactured on a massive scale. This suggests that the world may have to wait for many months, if not years, for a full medical response to the outbreak.

Over the past few weeks, as these facts have become clearer and the global spread of the virus has increased, the economic consequences have also come into sharper focus. Travel and entertainment industries are the most vulnerable, with significant declines in airline travel, hotel and cruise bookings, casino traffic and general tourism, particularly in regions with confirmed outbreaks. In addition, while Chinese manufacturing is ramping back up following contagion-related shutdowns, some continued disruption to global manufacturing is likely. Sharp stock market declines could add to consumer caution while, on the business side, the outbreak is creating uncertainty, which should slow both hiring and capital spending. While some niche industries may benefit from the demand for medical supplies and needs created by “social distancing,” in general the virus should slow economic growth. 

For the U.S., this could cause analysts to pencil in very low economic growth for a few quarters or even a decline in output. For the rest of the world, it should delay the rebound that was expected following a relaxation of trade tensions entering the New Year.

First « 1 2 » Next