Some market perspectives on this Coronavirus. It was listed as one of the risk factors I outlined in Lurking Risks and it appears to now be indeed market impacting as the virus has now been reported in 13 countries and futures indication for tonight are showing risk off for the moment.
Firstly let me state again that I hope this virus gets contained in short order. If it does then history suggests that any impact on markets would be temporary and soon forgotten as previous health scares were.
Nobody wants a virus to spread and cause extensive loss of life. Even if one is bearish equities and positioned as such, no reasonable person would take pleasure in seeing such an unforeseen trigger being a primary driver of a market sell-off. The bear case stands on its own, structural, technical, valuations etc. and remains a separate discussion.
But markets are extremely stretched and richly valued and one can never know what trigger creates a shift in sentiment.
The coronavirus is new and information about it is evolving daily, hourly even. Currently it appears to have a fatality rate of around 3%. While that sounds minor on the surface it really isn’t as history shows.
Humanity has lived with the common flu for as long as we can remember and it’s causing thousands of fatalities each year. It’s not pleasant, but is considered contained and, I hate to say, an accepted risk factor in life.
But the flu is no joking matter and has known to cause absolute havoc on humanity. Just a little over a hundred years ago the Spanish flu was an absolute disaster for the people at the time. It lasted for nearly 2 years and killed millions of people.
According to Wikipedia: “Probably 50 million, and possibly as high as 100 million (three to five percent of Earth’s population at the time) died, making it one of the deadliest epidemics in human history.”
Three to five percent of the earth’s population. That’s a significant number and translated to today’s global population a virus with similar impact would be absolutely devastating. With over 7.5 billion people on the planet now we’re talking 200-500 million people in a similar scenario.
That’s not fear mongering, it’s just math, so obviously it’s extremely crucial that this virus is contained and the fear of such an infectious virus explains why the Chinese government is so aggressive in restricting travel and building make shift hospitals.
This coronavirus at this stage has not produced anywhere near the fatalities that the common flu produces each year and hence on the surface is a non issue.
But this virus apparently bears a dangerous component: It transmits without a person showing symptoms:
China says the deadly Wuhan coronavirus can spread before symptoms show, calling into question the US strategy to contain it as a new case is confirmed in California https://t.co/CmSLCmTadZ
— CNN (@CNN) January 26, 2020
If that’s the case then I have to presume the next week or two will be very critical to see if it’s truly contained. Problem is anyone showing symptoms now will have been in contact with an unknown number of people who may now carry it, but are not showing symptoms. Yet. And these people may be spreading the virus as we speak without knowing.
That means that in the here and now nobody knows how many people are currently infected, how many people they have come in contact with and how many people will show symptoms in the next week or two.
A virus that is not contained, has no current immunization available, spreads without symptoms showing, and has moved global (13 countries at the moment) is your ultimate CDC nightmare.
Aside from the potential loss of life the global economic impact may be severe if it spreads.
Hence markets are not likely to treat this as lightly as they did initially did last week. Every day we will now get updates of any further signs of spreading. If the spreading of the virus shows to grow exponentially outside the initially affected Chinese cities the news may be met with an accelerating market reaction to the downside.
Likewise any news flash that shows the spread of the virus to be slowing is likely to be met with an aggressive relief rally.
Hate to be so binary here, but this is what history shows.
The world has been very fortunate in recent decades that all disease fear related sell-off were very temporary. Let’s all hope this will be the case here as well, but for the here and now, we’re dealing with a new global uncertainty factor and headlines need to be not only closely monitored for veracity as news flashes may also be hyped by a media that thrives on ratings, but at the same time the science and data will tell its own tale. So investors and traders need to pay close attention. The next few days may well be key on how this unfolds.
Coronavirus has quickly evolved from a lurking risk to a clear and present danger for a market that has just experienced a liquidity driven buying frenzy and is now faced with sizable corrective risk with coronavirus the potential and unwelcome trigger.
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