I wrote most of this memo over this past weekend, on the heels of the tumultuous seven-day correction. But I couldn’t get it out on Monday, and that day the S&P 500 rallied by 4.5%, or 135 points, for the biggest point gain in its history. I just can’t update it daily to take into account every rise or fall (or rate cut). And my real goal – as usual – is to suggest how to think about developments, not to say “buy” or “sell.” So please read this memo as of Sunday afternoon – whatever the markets have done since – and let me show how I assess the recent events.
I last used this memo title on September 19, 2008, two days after Lehman Brothers’ bankruptcy filing. This is certainly an appropriate time to recycle it.
Over the last few weeks, I’ve been asked repeatedly for my view of the coronavirus and its implications for the markets. I’ve had a ready answer, thanks to something from my January memo, You Bet! As you may remember, I drew heavily on quotations from Annie Duke’s book on decision making, Thinking in Bets. The one that stayed with me most – and that I’ve used a lot since the memo was published on January 13 – is this one:
An expert in any field will have an advantage over a rookie. But neither the veteran nor the rookie can be sure what the next flip will look like. The veteran will just have a better guess. (Emphasis added)
In other words, if I said anything about the coronavirus, it would be nothing but a guess.
I’ve written in the past about my reaction when people in China ask for my view of their country’s future. “You live there,” I say. “I don’t. Why are you asking me?” Not only am I not an expert on China, but I firmly believe the future of a country isn’t subject to prediction, especially one that operates under a system that’s unique. I furnish my opinion of China’s future, but I hasten to point out that it’s nothing but a hunch. People may ask me for my opinion because they think I’m intelligent, think I’ve been a successful investor, or know I’ve lived through a lot of history. But none of that should be confused with expertise on subjects of every kind.
And that leads me back to the coronavirus. No one knows much about it, since this is its first appearance. As Harvard epidemiologist Marc Lipsitch said on a podcast on the subject, there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation. The scientists are trying to make informed inferences. Thus far, I don’t think there’s enough data regarding the coronavirus to enable them to turn those inferences into facts. And anything a non-scientist says is highly likely to be a guess.
So, overall, there are facts, inferences and guesses. It’s always essential to know which you’re dealing with. As for the virus, I don’t think anybody knows the answers to the following questions:
How does the virus travel from person to person and community to community? – People have tested positive who had no known contact with other people who had it or who were in countries in which there are known
How many people will contract it? – On February 28, the head of the World Health Organization said it had “increased our assessment of the risk of spread and the risk of impact of COVID-19 to very high at a global level.” According to Dr. Lipsitch, it will affect 40% to 70% of all adult Americans. (I only provide this as an I don’t assert that it’s correct, or that his is the opinion to accept.)
Will it recede? – According to the reported data, the number of new cases in China has declined substantially, from 9 out of 13 days with more than 3,000 the first half of February, to 8 out of 9 with less than 500 at the end of the month. How much of this is a function of the restriction of people’s freedom of movement? To what extent can this downtrend be extrapolated to the rest of the world? Some say the virus will recede when the weather turns warm, as happens with other flus. Will that apply in this case?
What will its effect be? – To date, only 20% of those contracting the virus have experienced something described as more than “mild,” and the fatality rate has been only 2-3% of those infected. Will these percentages hold? Will the fatalities continue to be primarily among people who are elderly and/or compromised? 2% of Dr. Lipsitch’s 40-70% suggests a million deaths in the S. On the other hand, according to Dean Jamison, a global health economist and professor emeritus at University of California, San Francisco:
. . . the U.S. has a superior health system to China, where the outbreak is centered, and months of warning “I think we’re unlikely to see a really large outbreak in the U.S. — meaning thousands of deaths,” he said. (The Wall Street Journal, March 2)
What countermeasures will be taken? – Will schools and offices be closed? Will people be told to stay in their homes? Will food be delivered to homes as in China? Will large public events be canceled? Will a vaccine be invented, and when?
What will be the effect on the economy? – If people are shut in at home and unable to go to work, shop, eat out or travel as usual, how will GDP be impacted? How will a negative wealth effect impact people’s propensity to spend? “Zero GDP growth” means the same thing as “same as last year” – is that an optimistic expectation or a realistic one?
How will the markets react? – Since the markets’ reaction ultimately will be a function of both economics emotion, it seems impossible to quantify how far it’ll go.
I want to stress that the purpose of the above discussion isn’t to give answers or to appear to be complete or authoritative. If anything, it’s to indicate the degree of uncertainty. If it’s true, as I think, that these things are currently unknown and unknowable, then clearly there can be no such thing as a reliable statement regarding the implications of the virus.
In the early days of the disease, when the coronavirus was something that was happening “over there,” the effects likewise were mostly second-hand: