Over the last two months, global sentiment has transitioned from complacency to concern, and then to fear regarding the impact of the Novel Coronavirus (nCoV) on global economies and our daily lives.
Purportedly originating from non-sanitary meat markets near Wuhan, China, nCoV has spread across Australasia, the Middle East, Europe, and sporadically across the Americas.
Thus far, out of the 80,407 confirmed cumulative cases as of February 25th, close to 97% were recorded within mainland China. There have been 2708 deaths related to the virus thus far and 27,878 individuals have made a full recovery. 99% of virus-related deaths have occurred either in China or in countries that are less developed (e.g. Iran), indicating the mortality rate in developed nations is significantly lower.
Global stock markets fell sharply on Monday and Tuesday as outbreaks of virus continued to crop up across the globe. Investors are concerned that, as a result of the efforts to contain the spread of the virus such as quarantines, travel restrictions, potential import/export controls, global trade and supply chains will be disrupted leading to a global recession. Another concern is that the virus may become an incurable global pandemic, ultimately leading to a shrinkage of the global labor force.
There is currently scant data supporting any of these worries – the stock market has become a victim to speculation. Even so, we recognize the importance of monitoring the risk of “black swan” events developing. Here is what we are watching now to determine whether nCoV will, in fact, cause a meaningful shock to the global economy.
In the United States, the Institute for Supply Management releases its reports on the health of the domestic supply chain on the first and third days of each month. Similarly, IHS Markit releases its data on international economies throughout each month.
A running joke from the investor community has been, “you can’t ease your way out of a pandemic!” This refers to easing monetary conditions to stimulate the economy. We disagree. If money is being flushed into the global financial system via monetary easing, it needs to go somewhere. If it goes into stocks, the law of supply & demand would indicate that stock prices should increase, or at least decline less.
Tokyo hosts the Summer Olympics this year. If they are canceled, it would send a message that global leaders are losing the battle against nCoV’s spread.
Rate of change in new infections
Infection rates in diseases usually follow some variation of a bell curve, with few infections occurring near the first outbreak of the disease and then near its eventual demise. The most important point on that curve is when the number of new daily infections begins to decelerate. At that point, there can be comfort in knowing that the virus’s most infectious days are in the past.
Pundits predicting anything about nCoV, besides some short-term economic weakness in China, are speculating.
As they continue to jump to conclusions, we will be scrutinizing the data through the coming months and determine, through evidence-based analysis, if any changes to investment allocations are necessary.