Coronavirus Reaction: Historical Or Hysterical?

February 27, 2020

David Thomas

The coronavirus is the big news of 2020. Originally thought an airborne virus which can be contained by masks, corona is now believed to be a fecal-oral virus where masks are ineffective. Water sanitation and hand washing hygiene are the keys to prevention. This is practiced more in the developed countries than the developing countries. The virus has a longer incubation period than the typical 14 days and has been diagnosed after 27 days. It is contagious outside the body for longer than the typical 48 hours. According to the February 26 World Health Organization report, roughly 81,109 people worldwide have been diagnosed with the coronavirus, with the vast majority of cases located in mainland China. Only 2,918 cases tallied outside China. Markets historically (or hysterically) over react to news on both the upside and the downside. This may be the case here too. The 1918 flu epidemic had a 4% death rate and to date the coronavirus rate is less than that.   Reading the Apple corporate reports, the supply chain disruption is causing delays affecting quarterly earnings, but is not destroying the world economy. The global markets are reacting to this virus as the next bubonic plague which should lead to buying opportunities. For the crisis to widen, there would have to be person to person transmission leading to deaths in the highly sanitized developed countries. This would be a more serious threat and could deepen the panic. However, here is a report and graph from one of our investment managers in China:

China equities retreated after Mid-January, triggered by the outbreak of a novel coronavirus in China. However, the market has rebounded since Feb 4th, the second trading day after A-shares started trading after the long holiday of the Chinese New Year.  For us, the virus, which is a serious threat to health, is a short-term risk for China equities, and the most challenging time appears behind. The initial cases occurred in Wuhan, Hubei Province, China, in December 2019 and got worse after that. With the government’s austere measures restricting Chinese people from going outdoor and traveling, it appears that the number of diagnosed patients peaked in Mid-February and trended down significantly since then.

Chart 1: Sharp decline of daily new diagnosed patients in China (as of Feb 23rd, 2020)

As we have written in previous KnowRisk Reports, the markets are over 50% passive now with another 20-30% using automated computer, factor, and momentum trading systems. Fundamental analysis is a smaller part of today’s market. This lowers daily liquidity and leads to higher volatility.  While these factors exist, this effect on the stock market is permanent.