How Wall Street is analyzing the coronavirus
The coronavirus outbreak, labeled COVID-19, is an infectious disease that targets the respiratory system. The virus was first identified in Wuhan, China, a city within the central Hubei province, on Dec. 31.
By Jan. 30, the World Health Organization (WHO) declared the outbreak a global health emergency. The number of global cases had risen to 7,818, with just 82 located outside of China. All 170 deaths, however, were within China. As the number of new cases rose, the stock market took notice. From Jan. 17-Jan. 31, the Dow Jones Industrial Average (DJIA) fell 2,329 points (7.9%).
Soon after the Jan.30 WHO declaration, China assured the global community the pace of new outbreaks was declining and that requisite measures were being taken to contain the outbreak within its borders. Based on these assurances, the stock market surged, erasing the 7.9% coronavirus-led sell-off. On Feb. 12, the DJIA set a new all-time-high. On Friday, Feb. 19, both the S&P 500 and NASDAQ also reached record highs.
But the record highs were short-lived. By Monday morning, the WHO had reported the number of global cases surged to 79,331, including 2,618 deaths. China’s share was 77,262 and 2,595, respectively. Within China, 83% of all cases and 96% of all deaths were located within Hubei province.
The focus of the WHO report was the surge in new cases outside of China. Over the two-day weekend, the number of non-Chinese cases increased 47.6%, from 1,402 to 2,069. The majority of the 667 new cases were in South Korea (417), Italy (115) and Iran (25).
The weekend spike in these three countries conveyed a simple message to the global markets – the coronavirus was not as contained to China as once thought. It indicated to the Americas, Europe, the Middle East and the rest of the world that this virus was no longer just an “overseas problem.” Here in America, the stock market’s response to that message was punishing.
On Monday, the DJIA fell 1,031 points. On Tuesday, it fell 879 points – a day the U.S. Centers for Disease Control and Prevention (CDC) warned Americans to prepare for the spread of this disease in the U.S. On Thursday, the DJIA fell 1,190 points. Moreover, all three indexes reached correction territory – meaning all had declined by at least 10% from their recent all-time-high.
The financial markets are trying to gauge both the human and economic impact of this new virus. Their best tool has been comparing it to other known viral outbreaks – influenza (the common flu), SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome). As of Thursday, the WHO reports 82,294 global cases of coronavirus and 2,804 deaths. Though this calculates to a fatality rate of 3.4%, experts estimate the actual rate to be between 1-2%. 59 Americans have contracted the virus, 39 of which are on the Diamond Princess cruise ship quarantined off the coast of Japan. There have been no American deaths.
Now, compare this to the current October-May U.S. flu season. So far this season, in the U.S., the CDC estimates 29 million flu illnesses that have led to 16,000 deaths. For the 2018-2019 flu season, the CDC estimates 35.5 million flu illnesses with 34,200 deaths. For the 2017-2018 season, the estimates are 45 million flu illnesses with 61,000 deaths.
Historically, the CDC estimates the fatality rate for influenza at 0.1%. For comparison, per the WHO, the 2002-2003 SARS outbreak reported 8,098 cases and 774 deaths and a fatality rate of 9.6%. The 2012 MERS outbreak has 2,056 cases and 862 deaths with a fatality rate of 34%.
Yes, every single case of coronavirus is a tragedy. But the current 82,294 cases do pale in comparison to the 29 million American influenza cases and 16,000 deaths – and the 2019-2020 flu season isn’t even over. Then what exactly is driving this meltdown in the global stock markets?
The answer lies in governments’ response to this outbreak. In China, entire cities have been locked down. Manufacturing facilities, businesses and places of commerce have been closed. Schools, theaters, stadiums and other places of public gathering have been shuttered. Global travel into and out of China has come to a grinding halt. In Italy, the government quarantined several towns in its northern region. In other nations, factories, stores, schools and public places have also been placed on lockdown.
Though understandable, the unintended consequence of these lockdowns and quarantines is lower global economic growth. Last year, the global economy had its slowest pace of growth in more than 10 years. Hopes for an expected rebound in 2020 are quickly fading.
Apart from being the world’s second largest economy, China is also the world’s largest manufacturer, accounting for 28% of the world’s production output. Though some factories in China have restarted production, many remain closed or operate at partial capacity. China’s factories aren’t expected to ramp up to full production until April. Last year, China reported its slowest pace of economic growth in 30 years. On Monday, Chinese President Xi Jinping announced the coronavirus would significantly impact China’s already fragile economy.
China’s economic woes reverberate across the globe. Here in the U.S., China is our third largest trading partner. The U.S. is the No. 1 destination for Chinese goods, accounting for nearly 20% of all its exports. Embedded in those goods destined for American consumers are parts and components critical to U.S. manufacturing supply chains. In fact, according to Fortune, 94% of the Fortune 1000 companies are seeing a disruption in their supply chains caused by the coronavirus epidemic. The Fortune 1000 are the 1,000 largest U.S. companies based on revenues.
For the financial markets, it’s wait-and-see. Does this global outbreak last a few more weeks or a few more months? The longer it lasts, the more this virus will spread and the more nations will impose quarantines and restrictions on the economic engine that fuels their economy.
Comparing the coronavirus to U.S. influenza is a double-edged sword. Yes, with influenza, tens of millions of Americans become infected each flu season resulting in tens of thousands of deaths. But unlike the American flu season, where people continue to go to work and carry on with their daily lives, with the coronavirus, entire nations can come to a grinding halt – just look at China.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
