The COVID-19 coronavirus has overtaken and decimated financial markets just as quickly as it has spread across the globe, infecting and killing thousands of people.
And while the Dow jumped up to nearly 1,295 points in volatile trading by market close Monday – its biggest one-day point gain in history – the one thing we can be certain about is that this is far from over.
In fact, there’s going to be plenty of market swings ahead.
As bad as it’s been for global stock markets, it will get a lot worse as the number of deaths attributable to the virus increases dramatically along with infection rates – and most frighteningly, mortality rates.
Starting today, I’m sharing with you a series of ongoing reports documenting the coronavirus’s impact on lives, economies, and financial markets – specifically, asset classes to avoid and invest in. You’ll get weekly updates on markets along with specific stock recommendations designed to profit and protect portfolios from the virus’s spreading impact, and what to invest in when the crisis recedes.
Because even though stocks were prone to a sell-off for weeks, based on most valuation metrics… this, and what comes next, is fundamentally different from anything we’ve seen…
What Is a Coronavirus?
Coronaviruses get their generic name from the corona or crown-like shape the viruses exhibit.
According to the U.S. Centers for Disease Control and Prevention (CDC), “Coronaviruses are a large family of viruses. Some cause illness in people, and others, such as canine and feline coronaviruses, only infect animals. Rarely, animal coronaviruses emerge to infect people and can spread between people.”
Zoonotic coronaviruses, as transmuting viruses are known, include Severe Acute Respiratory Syndrome (SARS), which scientists believe originated in bats and was transmitted to civet cats, and Middle East Respiratory Syndrome (MERS), which scientists believe originated in camels.
The “novel coronavirus” (novel means new, as in not previously identified), or 2019-nCoV, (CoV is the CDC’s notation for coronavirus), or COVID-19 (where CO stands for corona, VI for virus, D for disease, and 19 for the year the virus was identified), the World Health Organization’s official name for the novel coronavirus, is thought to have originated and transmuted as a zoonotic coronavirus from a live animal market in Wuhan City, Hubei Province, China.
However, the exact origin of COVID-19 remains unknown.
Coronavirus and the Flu
The coronavirus and the influenza virus are not in the same family of viruses, though their impact on humans is similar.
Both COVID-19 and the flu affect the human respiratory system, first the upper respiratory system, and more problematically the lower respiratory system, specifically the lungs.
One of the reasons the novel coronavirus isn’t as deadly as yearly influenza breakouts is COVID-19 mostly infects the throat. It’s when the virus makes its way through the respiratory system, to the lungs, that more serious complications begin.
Like the flu, the coronavirus manifests itself in symptoms including fever, coughing, shortness of breath, and like the flu, it can result in pneumonia, kidney failure, and death.
Both influenza viruses and coronaviruses are capable of “minor point mutations” that cause small changes in the virus’s structure, known as “antigenic drift.” Antigenic drift can occur relatively often and enables the coronavirus to evade CoV immune recognition, making COVID-19 sometimes hard to identify and potentially capable of mutating into variations of the current virus.
Global Spread of COVID-19
The greatest fear surrounding COVID-19 is that the virus spreads faster and further, infection rates increase dramatically, and mortality rates spike.
Since the novel coronavirus is increasingly being compared to influenza viruses and the flu’s infection and mortality rates, it’s important to understand current and historic comparisons.
According to the CDC, the 2019-2020 flu season in the United States, beginning Oct. 1, 2019, as of Feb. 1, 2020 somewhere between 26 million and 36 million people contracted the flu. As of Jan. 31, 2020 (February figures come out next week), 180,000 people have been hospitalized and 10,000 have died from influenza complications.
Historically, since 2010, the CDC reports between 9 million and 45 million people in the United States annually become infected with the flu. Between 140,000 and 810,000 annually are hospitalized. And deaths annually are between 12,000 and 61,000.
According to Dr. Jeremy Brown, Director of the Office of Emergency Care and Research at the National Institutes of Health, the Great Flu of 1918 (more commonly known as the Spanish Flu), which lasted 15 months, infected 500 million people worldwide and killed 50 million, 3% to 5% of the world’s population at the time.
Dr. Brown recently warned COVID-19, though not nearly as virulent as the Spanish Flu, could wreak havoc across the globe.
COVID-19, like the flu, is transmitted mainly by coughing, sneezing, possibly talking, and touching contaminated surfaces. Infection occurs through the mouth, nose, and eyes.
An analysis of 22 earlier flu-like viruses showed infections remain on inanimate surfaces for as long as nine days at room temperature. Scientists believe influenza and coronaviruses thrive in low-temperature, low-humidity conditions, which is why cases proliferate in the Northern Hemisphere during autumn and winter months.
But COVID-19 is showing up in the Southern Hemisphere and equatorial countries, too.
As of Saturday, Feb. 29, 2020, at 20:35 GMT, government officials have acknowledged COVID-19 infections in several Southern Hemisphere countries, including Australia, New Zealand, Indonesia, Brazil, and equatorial countries including Ecuador, Algeria, and Nigeria.
In the Northern Hemisphere so far, there are a total of 90,294 coronavirus cases and 3,086 deaths. China acknowledges 80,026 people have been infected and over 2,900 have died. South Korea has seen more than 4,300 infected and at least 28 deaths. Iran has reported around 1,500 cases and 66 deaths. Italy has seen over 2,000 cases and 52 deaths.
A total of 55 countries so far, including France, the United Kingdom, Turkey, Iraq, Pakistan, Lebanon, Kuwait, Taiwan, and Thailand, have reported cases, with many of them registering small numbers of deaths.
The United States saw its first two deaths from the virus this past weekend. Cases are cropping up in Washington State, Oregon, California, Rhode Island, and New York and are expected to spread to other states.
There is no vaccine for COVID-19 as of yet.
The Impact of COVID-19 on Financial Markets to Date
Global markets and U.S. equity markets, after posting all-time highs in mid-January 2020, started retreating on news out of China that Wuhan and other Chinese cities were being “quarantined” on account of spreading coronavirus infections and deaths.
On Jan. 31, 2020, markets plunged, with the Dow Jones Industrials Average falling 603.41 points, or 2.1%, to close that Friday at 28,256.03.
But news out of China on Monday that the rate of infections was slowing buoyed investors’ hopes the coronavirus crisis was under control and receding.
Within two weeks, stocks rebounded.
The Dow, from its Jan. 31, 2020, lows to mid-February, rose an astounding 1,312.54 points, or 4.6%, to post a new record high of 29,568.57 on Wednesday, Feb. 12, 2020.
Then more negative news surfaced. The coronavirus was spreading to other countries, and equities fell on Thursday and Friday.
On Saturday, Feb. 15, 2020, Chinese officials revealed 15,152 new coronavirus infections and a one-day death toll of 254 from the epidemic.
U.S. markets tried to calm themselves the following week but couldn’t. More bad news, more infections in more countries, mounting infection rates and deaths outside China rattled investors on Thursday and led to a hard sell-off on Friday, Feb. 21, 2020.
Over the weekend, traders began selling futures in Asia. Asian markets opened down big on Monday. European markets immediately followed suit.
And by the time U.S. markets opened on Monday, Feb. 24, 2020, sell orders were swamping brokerages and exchanges.
Globally, with emphasis on U.S. equity markets, stocks have been in a virtual free fall since then.
The week of Feb. 24, the Dow fell a shocking 3,583 points, just shy of a 12% drop, closing at 25,409.36. That’s a 4,159.21-point drop, or a 14% fall from the index’s mid-February record high.
As far as “corrections,” when an index drops 10% from its highs, the Dow’s dramatic fall is its fastest correction in history.
The same is true for the S&P 500, which dropped 11.49% last week, and the Nasdaq Composite, which also dropped 11.49% last week.
Investors in U.S.-listed equity markets lost $2.8 trillion on the week and $4.6 trillion since Feb. 19, 2020.
Selling wasn’t confined to U.S. equities.
Also in the week of Feb. 24, China’s Shanghai Composite fell 5.6%. Japan’s Nikkei dropped 3.37%. Australian and South Korean benchmark indexes both fell 3.3%. Germany’s DAX lost 3.9%. The London FTSE 100 shed 3.4%. And Italy’s FTSE MIB index dropped 3.6%.
The MSCI index, which tracks shares in many of the world’s biggest companies, fell 8.9% – its worst percentage decline since October 2008.
A total of $6 trillion of global market value was destroyed that week, according to S&P Dow Jones Indexes senior analyst Howard Silverblatt.
The “flight to quality” trade has driven the U.S. Treasury 10-year note’s yield to 1%. And oil, a benchmark of global demand for commuting, manufacturing and mining, consumption, and growth, measured in terms of U.S. WTI, West Texas Intermediate, fell 16% over the week to $44.76 by Friday, Feb. 28.
Is This Time Different?
Maybe.
Equities and equity markets, often valued in terms of metrics like price/earnings ratios, price-to-sales ratios, discounted cash flow models, and by other absolute and relative measures, often fall or “correct” when investors fear they’ve exceeded any number of metrics and have become “overvalued.”
Whether stocks fall because company fundamentals appear overvalued, are demonstrably weakening, or stock prices breach technical indicators like declining through 50-day or 200-day moving averages, most sell-offs and corrections are based on repricing relative to valuation metrics or price-movement trends.
And while stocks and equity markets in the United States and globally were, by most valuation methodologies and price-movement metrics, prone to some kind of sell-off for weeks or months – some analysts say quarters or years – prior to their mid-February slide, the free fall markets experienced last week and may be prone to in the future are fundamentally different.
Different as in, “This time is different.”
Aside from company and consumer impacts that China and some Pacific Rim countries felt in 2003 as a result of the SARS virus, globally, the world has never seen major cities, including economically important manufacturing cities like Wuhan, China, and Milan, and other economically important Italian cities in the country’s North, shut down.
Equity prices are falling because global commerce is being impacted to the point where companies have been shuttered, cities have been quarantined, countries’ institutions including schools in Japan are being closed, and consumers are losing confidence in governments’ abilities to stem the growing pandemic.
That’s what’s different this time.
What’s next will be more chilling than what we’ve seen to date…
The Chinese economy will collapse, and the country’s incipient recession will become a depression.
Global economies and equity markets will suffer from the fallout.
U.S. equities will enter bear market territory, quickly posting more than 20% losses from their February highs, but will be the first to bounce higher as America once again becomes a global haven for capital and investment.
Interest rates will turn negative in more countries, and the global value of government bonds with negative yields will exceed $20 trillion, double current levels.
Bonds prices will rally, and yields will collapse, eventually making bonds far more volatile than equities as a spike in short-term depreciation fears gives way to a burst of inflation.
Commodity prices are going to fluctuate wildly.
Gold will exceed $2,000 an ounce by the end of the second quarter, 25% higher than where it trades today.
Fortunes are going to be lost and made.
— Shah Gilani
Source: Money Morning