Stock markets should fully recover in the 2nd half of the year 2020…

Posted on Posted in Liberty Village, Market Commentary

Herd Immunity versus Quarantine!


Equities experience an early Santa Claus rally.

Goldman Sachs just hosted an Investee call where 1500 companies dialed in. The key economic takeaways were inclusive of the following:

50% of Americans will contract the virus (150m people), as it is very communicable. This is on a par with the common cold (Rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2-4 per year.

70% of Germany will contract it (58M people). This is the next most relevant industrial economy to be affected.

Peak-virus is expected over the next eight weeks declining thereafter.

The virus appears to be concentrated in a band between 30-50 degrees north latitude meaning that like the common cold and flu it prefers cold weather. The coming summer in the northern hemisphere should help; this is to say that the virus is likely seasonal.

Of those impacted, 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu in which the response is to stay at home for two weeks and rest. Meanwhile, 5% will be critical and highly weighted towards the elderly and immunocompromised with a mortality rate of – on average – up to 2%; thus, meaning up to 3m people (150m*.02).

In the US., about 3m/yr die mostly due to old age and disease, those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3m new deaths from the virus, it means elderly people dying sooner due to respiratory issues. This may, however, stress the healthcare system.

There is a debate as to how to address the virus pre-vaccine. The US is advocating towards quarantine. Alternatively, the UK is leaning towards allowing the virus to spread, so the population can develop a natural immunity. Quarantine is likely to be ineffective, and could evidently result in significant economic damage, but will slow the rate of transmission – thus giving the healthcare system more time to deal with the case load.

China’s economy has been largely impacted which has affected raw materials and the global supply chain; it may take up to six months for it to recover.

Global GDP growth rate will be the lowest in 30 years at around 2%.

S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall.

There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the 2nd half of the year.

In the past week there has been a conflating of the impact of the virus with the developing oil price war between KSA and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time, as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.

Technically, the market generally has been looking for a reason to reset after the longest bull market in history.

There is NO systemic risk; no one is even talking about that.

Nonetheless, to end on a positive note, Happy St. Patrick’s Day! Erin Go Bragh (Ireland Forever)!

Have a wonderful day!

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