The Week in Review: February 3, 2020
When Stocks are Priced for Perfection
When stocks are priced for perfection, the market can become vulnerable to unexpected events. Since early October, market tailwinds have been strong. These include low-interest rates and an expanding Fed balance sheet via T-bill purchases, modest economic growth, and subsiding trade tensions.
Market headwinds, well, they have been largely absent, until recently. The unexpected event that has triggered volatility: an epidemic in China. It’s just the right excuse for traders to sell.
The coronavirus has sickened nearly 9,700 people and claimed the lives of 213 people, nearly all in China (MarketWatch as of January 31). The number of cases worldwide has more than doubled since last Monday (Wall Street Journal).
It’s not that we’re facing a serious crisis at home. Odds of such an event remain low. Investor concerns stem from fears the virus in China will interrupt commerce, slow its economy, and possibly pressure global growth, at least temporarily.
The flu vs coronavirus
We’ve seen epidemics before. The World Health Organization declared an emergency during the 2016 Zika virus, the 2009 H1N1 swine flu, and the 2014 Ebola outbreaks, and the bird flu epidemic in 2005-2006. In 2003, we grappled with the outbreak of SARS in China.
However, any direct health or direct economic impact on the U.S. will probably be negligible. However, any possible indirect impact is creating some instability.
The graphics below from the Centers for Disease Control and Prevention illustrate the toll this year from the flu versus that of the coronavirus.
Yet, Americans aren’t shy about flying, shopping, taking in a movie, or going to a restaurant.
Further, through January 31, of the 241 people who have been under investigation, 114 have tested negative, and only six have tested positive per CDC.
Clearly, the flu has been a much bigger deal; yet, before the coronavirus outbreak, we weren’t treated to a steady stream of pictures of people wearing protective masks; pictures that can sometimes instill unnecessary fear.
I suspect the number of cases in China will continue to rise, and we may see additional volatility until investor confidence rises that China has the epidemic under control. I do not claim to have any idea how far this outbreak will spread, nor how many lives it will claim before it is brought under control. I’m reasonably certain that many (or perhaps most) of the world’s leading virologists and epidemiologists are working on it, and I believe that their efforts will ultimately succeed. Clearly, this is nothing more (or less) than my personal opinion.
Without belaboring the point: the super-spreader of SARS – a fish seller – checked into a hospital in Guangzhou on January 31, 2003, basically infecting the whole staff. The epidemic exploded from there. On that first day of the litany of epidemics cited above, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), this past Friday the Index closed fairly close to four times higher. I’m confident that you see where I’m going with this.
Medium and longer-term, the economic fundamentals have the biggest influence on equity prices. Up until last week, that had been the case.
If you have any questions or concerns, feel free to reach out to me.
Two for the Road
In 2004, Microsoft convinced Puerto Rico to grant them a tax rate of 0%. Microsoft then sold their intellectual property to a subsidiary and routed their North American profits to them, rather than being in the United States where they would face a 35% tax. In 2006, Microsoft had stashed $1 billion offshore. By 2017, that had accumulated to $140 billion. - ProPublica, January 22, 2020
About half of the top-grossing concert tours in North America last year were led by artists who were 60 years old or older. The top three spots were held by artists in their 70’s: The Rolling Stones, Elton John, and Bob Seger. Others included Paul McCartney, Billy Joel, Cher, and Fleetwood Mac.-The New York Times, January 7, 2020
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