COVID-19 Worry Overblown; Market Discounts Recession

– Given past outbreaks, investor panic over coronavirus health risks looks overblown

– Case growth slowing in China; it reportedly shut down last temp COVID-19 hospital

– There will be some economic disruption through 2Q but market should recover

If you haven’t noticed, this column is called Signal from Noise, the point being to ignore the noise and focus on the market’s signal. Normally that’s what I try to accomplish but the noise lately is so loud that it must be addressed.  Indeed, in pointing out what the noise is, I believe we might reach the signal.

The market has been hit very hard by fear of coronavirus. Since reaching a high of 3386.15 on February 19, it’s basically been downhill and quickly in an unhappy rollercoaster ride for investors.  As of midday today, the Standard & Poor’s 500 index has fallen about 19% from its high. The Dow reached a bear market intra-day today.

Let’s break down the market worries—as I see them—for there are at least two caused by the rapid spread of coronavirus, or COVID-19, a new flu type pathogen that affects the lungs and has roughly  a 3%-4% mortality so far.

First, is this a serious health concern? Yes. Is the virus alone something that should make the market puke up stocks and knock it down 19%? Not so much, I think. The media hype around this is circus like, except it’s not entertaining. Consider this recent more level-headed stat from Bloomberg: media mentions of “Swine Flu” in 2009 vs coronavirus today: more than double the coverage today yet Swine Flu was 100 times worse (so far), infecting 61 million people in the US and 12,469 deaths, and 575,400 globally. Wow.

I don’t wish to downplay the deaths. Sadly, more people will die; many will be hurt.  An investor must tune that out. If there is something for investors to worry about, it is the possible knock on effects of this COVID-19 panic on the economy, a self-fulfilling prophecy, if you will. (I’ll get to this below.) Already, many people have stopped their daily activities, working, shopping, eating out, entertainment, etc.  The travel industry is suffering, countries are closed, conferences cancelled. This isn’t a good thing for companies.

I’m not a medical expert but here are some accepted facts and comparisons that investors should consider. The terrible Ebola virus of 2014-2016 was a highly contagious and fast spreading disease that killed over 28,000 people with a nearly 40% mortality rate. It was contained and the market rallied on long term.

Think about this too: Since last September, 32 million Americans were infected with seasonal influenza, the flu, sending 310,000 people to the hospital and killing 18,000.  According to the U.S. Center for Disease Control, since 2010 the common flu has been responsible for 12,000-61,000 deaths annually.  The stock market hasn’t tanked on that because it is a known quantity.

Compare that to the latest coronavirus stats worldwide: it has infected over 120,000 people with about 4,400 dead as of midday today. I don’t downplay the fatalities. But for the investor there seems strong evidence already that the spread can be contained.  China reports the disease has peaked there and the number of cases falling. 

The Chinese stock market is up about 8% from its low on Feb. 3, which in turn was down about 16% from the previous high last April. There are reports China has closed all of its 16 temporary coronavirus hospitals. If China, a still developing nation with four times the U.S. population, can seemingly contain this virus why couldn’t the U.S.? I think that’s a question to which the bears have no real answer.

If you don’t believe the Chinese government, I understand. South Korea, with 7,513 COVID-19 cases as of Monday, also has seen infections falling, and for a fourth consecutive day. I believe South Korean stats.

Here are some other things to think about: coronavirus isn’t heat resistant, with just 26-27 degrees Celsius enough to kill it.  Meanwhile, the Northern Hemisphere, where most of the cases are, is heating up. Normal laundry detergent will kill coronavirus.  To me all this should not add up to panic.

The spread of the coronavirus, bad as it is, worries me much less than what it means for the economy. Oil prices have crashed into a bear market and that’s caused heavy damage in the energy sector, which hadn’t been doing too well anyway. This could be cause for short term worry.  Nevertheless, lower energy costs are good for everyone else long term.

The negatives are clear.  Highly-leveraged companies could be pushed to the edge as economic growth slows, hurting cash flow.  Corporate profits growth in 2020, which looked robust two months ago, now don’t. Aggregate first quarter SPX EPS profits estimates are now negative compared to +4% previously.  The projections for 2020 as a whole are sure to follow.  That’s not good for stocks.

The world could see a significant growth slow down.  Goldman Sachs recently said the U.S. would register GDP growth of just 0.9% in the first quarter and wouldn’t grow at all in the second quarter – representing the worst six-month window the economy has seen since the Great Recession. Global institutions are lowering their world GDP estimates.  The risk of recession, which had scared investors for much of 2019, is back.

Yet these numbers won’t be nearly as important as the day the market believes coronavirus is contained.  Given past similar outbreaks, I think virus-related fears could subside by the end of the 2Q. The world will resume its activity and businesses will fix their supply chains and resume production at normal capacity. Coronavirus is a temporary disruption to an economy that was doing nicely.

Besides lower energy prices, other offsets include likely future monetary and fiscal stimulus in the way of coronavirus fighting funds and a possible tax cut. The market’s P/E is now less than 17 times trailing EPS, not particularly expensive by historical lights.  These potential factors don’t seem to be pushed by the media or discounted by investors, particularly in view of the fact that the market is on the edge of bear market.

The scare-mongering numbers just don’t add up. Yes, it could get worse but it could get better and history suggests it won’t be nearly as bad as it’s made out. I think we could have two “lost” quarters. And what if a vaccine or treatment is found soon?

Where I could be wrong:  The coronavirus spread is unpredictable and its mortality rate could worsen appreciably. It could take much longer than expected to be contained.   

Bottom Line: Don’t press the panic button. The World Health Organization today called the spread a pandemic.  Could that mark the low?

Prior “Signals”