Chart of the Month – April 2020
We have just come through one of the most volatile three weeks in stock market history as markets grappled with the possible outcomes of the COVID 19 epidemic as it became a pandemic. The first question is how many people may contract this disease and secondly, how many might die and thirdly, how much this may affect the economy. North America is some weeks behind both Asia and Europe when looking at the spread of the outbreak. We are seeing exponential growth in the number of projected cases. It is not our place to justify any of these projections, but a common estimate seems to be that every person infected will infect two others per week. Theoretically, this could mean moving from 1,000 confirmed cases in the United Stated to matching China’s 80,000 cases within a month. A second month of expansion at that rate would lead to the hospital system being overwhelmed, similar to Italy’s current situation. Efforts are in place across most countries to try to “flatten this curve” to prevent overwhelming the medical system. However, this effort is also bringing the economies of the countries to a screeching halt. Even if they are successful in curtailing the outbreak the economy will certainly suffer for a period of time.
Our job is not to play virologist but to examine what might happen to securities markets. Many are trying to compare COVID 19 to SARS and MERS but this is much worse than both of those outbreaks. The result of the SARS outbreak was approximately 8,000 cases with 774 deaths across 29 countries. At the time of writing COVID 19 has claimed approximately 6,500 lives and infected at least 165,000 people. Countries are blocking travel and shutting down their cities and their economy.
The last time we saw travel restrictions of this magnitude and the economy being shut down was in the 10 days following the September 11 terrorist attacks. You might remember that even the Chairman of the Federal Reserve, Alan Greenspan, was unable to fly back to the U.S. from France. As a result of these attacks the New York Stock Exchange was closed for trading and when it reopened the market fell by some 15%. In this light it seems far more sensible to look to the aftermath of 9/11 when looking for a potential outcome of COVID 19 than to look to SARS.
We have charted both the S&P500 and the 30 Year U.S. Bond Futures contract following the attack in an effort to find what might be in store for us.
After the initial shock of 9/11 the market snapped back quite quickly and within 12 weeks had regained its former levels. In 2001 the shutdown period was relatively short, while in this situation the economic shock is likely to be more prolonged. The eventual recovery will depend on how much lasting economic damage is done.
As you can see from the solid red line on the chart the downturn on the S&P in the first few weeks of the COVID 19 outbreak has been more severe than even the 9/11 attack. If the market was to track the same pattern as it took after 9/11 we would expect an uptick of about 10% as the panic subsides, at which point a more pragmatic assessment of the economic damage can take place and be reflected in stock prices.
