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The “Avoidance” Reaction

Preamble

I received an email from my travel agent last Monday (March 2) informing me that, because Italy had been raised to a Travel Level 3 by the CDC (strongly advised not to travel there), our vacation to Italy (March 12-22) had to be postponed, else we risked being quarantined upon our return.  In addition, the previous Friday, two corporate meetings in my immediate schedule for the week in the SF Bay area were changed from physical presence to telephonic.  This was my personal experience as a result of the coronavirus; but think of all of the businesses cancelling meetings, and the impact on the economies and businesses of the destinations.  In addition, think of the cost to nearly every mid-sized and large business to have to deal with keeping employees safe, including working from home, paid time off if an employee feels ill or for school closures, increased cleaning/sanitation costs, meeting cancellations ….  This list goes on.  The “Avoidance” Reaction is alive, well, and in full force and effect.

Some Things Don’t Add Up

The Wall Street Journal (WSJ) headline on p. A-7 of its March 5th edition read: U.S. Death Toll From Coronavirus Rises to 11.  As of March 6th, as I write, the U.S. death toll has risen to 14, and there are 340 known cases in the U.S. according to Johns Hopkins University.  And, surely, there will be more.  But, let’s remember that there are more than 330,000,000 people who live here.

About two years ago (February 9, 2018), there was a Bloomberg headline that read: Flu Is Causing 1 In 10 American Deaths And Climbing.  The sub-head read: … this year’s epidemic may be killing 4,000 people every week.

While the current state of anxiety here and abroad has caused (just to name a few),

a run on hand sanitizers and other consumer staples (Costco had record sales of such items the last couple of weeks); school closures in some U.S. cities (and in the entire countries of Italy and Iran); cancelled business meetings, concerts, conventions vacations; $8.3 billion in new U.S. spending to fight the virus; and $80 billion from the IMF, most people in the U.S. do not get an annual flu shot (WebMD says only 5% to 20%), despite the fact that, so far, the annual flu is much more deadly!

The Coronavirus is no laughing matter, but the reaction to it seems quite overdone when compared to the annual (ho-hum) flu!

Let’s Get The Data Right!

On a daily basis, we see the global case count (102,000 as I write, and surely higher when you read this).  While this data is nice to know, it is not the data that is important.  Some of those cases originated in December and January.  Most of those who had it back then have recovered and are no longer infectious.  The relevant data is the number of “active” cases.  That data exists, but it isn’t widely reported, and I had to dig for it.  The chart below shows that the number of “active” cases worldwide peaked on February 17th at 58,747, and, by March 4th had fallen to 38,501 (with a slight rise to 39,425 on March 5th).  This is less than 40% of the headline 102,000 number!

It is also important to know the number of new cases versus the number of recoveries.  From the chart below, it looks very much like the number of recoveries in China are much higher than the number of new cases.  Meanwhile, on the right-hand side of the chart, the new case count has once again risen above recoveries, as the rest of the world struggles for control.

In addition, the media reports, sometimes hourly, the number of deaths (3,491) as I write.  Are we supposed to assume that all age groups are equally susceptible?  The table below shows that there are almost no fatalities in younger cohorts, with most of the danger being in the elderly populations.  For example, 14.8% of those over 80 years old who contract the virus are likely to die, while the death rate for those under 40 is 0.2%.  So, not only is the probability of contact low, but the death rate in the working age population from the virus is also quite low.

The annual flu outbreak in the U.S. occurs in the winter months (we call it “flu season”).  It recedes in the summer.  The CDC says it doesn’t know if this will be the case for Covid-19.  But the map below would appear to indicate that this might very well be the case.  Note that the number of cases in the southern hemisphere, where it is summertime, are significantly lower than the case count in the northern hemisphere.

Economic Impacts

Due to the reactions of governments, businesses, and households to the outbreak of this virus and its very contagious nature, the economic impacts will be quite significant.

  • The February Employment Report (Establishment or Payroll Survey) was surreal at +273k with over +80K of upward revisions to the prior two reports. Consensus was +175k.  The survey was taken in February’s first half when there was little concern about Covid-19.  Remember, equities peaked on Feb 19th.  In that report, the leisure industry added +51k jobs.  Given all of the cancellations, expect to see negative numbers in this industry for the next few months.  (As an aside, even the beleaguered airlines added +2k jobs in the February report).  Construction added +42k, but this was clearly due to the warm weather causing the seasonal factor to distort reality.  The birth/death algorithm added +97k.  Without those just mentioned, the underlying job growth was just +81k.  The companion Household Survey showed only +45k, and if we only look at the non-farm employees, then the Household Survey showed another negative at -54k. (The Household Survey has been weak for several months in a row!) In addition, workers in the prime age group (25-54) showed up in the Household Survey as -61k, while teenagers (16-19) came in at +105k.  What this tells us is that there is strength in fast-food employment, but weakness in America’s core businesses.  Finally, part-time for economic reasons (need the extra income) were +136k.  What does that say about the state of the consumer?
  • Given what we know about the “Avoidance” Reaction so far, the travel and leisure industry will be hardest hit (airlines, hotels, restaurants, theme parks, movie theaters (the latest James Bond movie premier was postponed until September)).
  • From early anecdotal data, the travel business was off about 25% in February. Given that the “Avoidance” Reaction only began after February 19th, look for March to be worse.
  • Oil demand looks like it is set to decline by more than 2 million barrels/day, the first decline since ’09, and the price of oil is falling despite OPEC’s efforts to stem supply (Russia, apparently, is not cooperating). This used to be good for the U.S., but now it is a mixed bag.  S. consumers benefit from lower prices, but since the U.S. is now the world’s leading supplier, that industry gets devastated.
  • China actually ran a trade deficit of -$7.1 billion in the January-February period (lack of exports), and their auto sales were down -80% in February compared to a year earlier.
  • China, Japan, Italy, So. Africa: these countries are already in recession, and it appears that Australia and Germany are close as is much of the EU.
  • Last week, we had record breaking drops in bond yields. On Friday, the 30-year T-Bond yield dropped the most in any single session in my long tenure in the bond business.  The yield closed on Friday below1.3%.  Had you purchased the 30-year just three weeks ago, the profit now in the price is equal to 10 years of the coupon.  The Fed reduced rates 50 basis points in a surprise move, but markets still perceive the Fed as being behind the curve and late to the party by at least 50 basis points and maybe even up to 75.  In the modern era, every time the Fed has done an intermeeting cut (all have been 50 basis points except in 2008, when they cut 75), they have always cut again by 50 basis points at the very next meeting.  The next meeting is the week of March 15.  If they don’t cut….

Conclusions

Most of the hard data we have so far appears irrelevant, as it was pre-virus concern.  The data we get for March and beyond will begin to tell us how deep and long the economic impacts of the “Avoidance” Reaction will be.  We won’t really start to get that data until April, so until then, we can only try to glean and guess.  Because of these uncertainties, the equity market appears to be in panic mode.  The bond market, on the other hand, is convinced that the economic impacts will be serious.

Sometime in the near future, this virus threat will recede.  Sometime after that, the “Avoidance” Reaction will also recede.  Just a word of caution.  Like the Northern California wildfires, which seem to reappear every summer, investors and those who run or manage businesses should prepare for the reappearance of this virus or something similar in the future, i.e., this is not just a one-off event.  The economic implications are also serious.  In a world of slowing growth, bouts of anxiety and the “Avoidance” Reaction will only further slow that growth.

Robert Barone, Ph.D.

March 9, 2020

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