The coronavirus has thrown the markets for a loop, understandably. Half of the solution is understanding the problem, so we are reassured by the universal and unified policy responses globally.
On Tuesday, March 17, 2020, Laffer Associates hosted a conference call on the medical and scientific response to the coronavirus. According to Dr. Michael Stabile, a top professional in HCA’s medical system, and Dr. F.J. Campbell, Chief Medical Officer and Chief Quality Officer of Ardent Health Services, the US is much better prepared than much of Europe to minimize fatalities. A critical determinant of success is the number of intensive care unit (ICU) hospital beds per 100,000 people in a population. The US has 34 ICU beds per 100,000, similar to 29.5 in Germany but significantly above the 12.5 in Italy and 6.6 in the UK. They believe that two to three weeks ago, the US entered what in hindsight will be a two-month cycle at which point fatalities should peak, probably at much lower rates than most people now fear.
Global Policy Resolve Can End Crises and Cause or Sustain Bull Markets
I recall three periods of global policy resolve during my career, each of which launched or sustained significant equity bull markets: The Plaza Accord in 1985, Y2K in the mid-to-late 1990s, and the Global Financial Crisis in 2008-09. Each response was either in anticipation of or in the midst of serious economic setbacks and, although some of the bull markets ended in excesses that required correction, investors enjoyed equity appreciation for a minimum of two years.
After a 50% increase in the dollar from 1980 to 1985, for example, finance ministers from around the world gathered at the Plaza Hotel in New York City, acknowledged the risk of widespread deflation in a dollar-starved world, and coordinated policies to normalize currencies. In response, the S&P 500 nearly doubled during the next two years.
On the heels of a Computerworld article, “Doomsday 2000”, in 1993, Massachusetts programmer David Eddy coined the acronym Y2K in the middle of 1995, inspiring books like McGraw Hill’s “The Year 2000 Computing Crisis” in 1996 and guidelines like the British Standards Institute’s “Year 2000 Conformity Requirements” in 1997. As governments around the world aimed both fiscal and monetary policies at thwarting a technology-related economic meltdown at the dawn of the new millennium, the S&P 500 more than tripled during the four years from mid-1995 to late-1999.
Finally, during and after the subprime mortgage meltdown and Lehman Brothers’ bankruptcy during the Global Financial Crisis (GFC), fiscal and monetary policymakers around the world united in their efforts to prevent economic collapse, highlighted famously in 2012 by European Central Bank President Mario Draghi who proclaimed, “…the ECB is ready to do whatever it takes to preserve the euro… And believe me it will be enough.” From its low point in March 2009, the S&P 500 had more than quintupled at its peak earlier this year.
Global Policymakers Are United in Attacking the Coronavirus and Averting Recession
So, here we are again, this time facing the global economic consequences of a virus named “SARS-CoV-2” and the disease it causes, “coronavirus disease 2019”, COVID-19. Governments around the world are responding once again with resolve, both fiscally and monetarily.
A few weeks ago, in an effort to understand how serious COVID-19 might be, I interviewed Professor Isaiah (Shy) Arkin, the Arthur Lejwa Professor of Structural Biochemistry at The Hebrew University of Jerusalem, whose expertise includes flu viruses. Please find the link to our podcast here.
While discussing the worst, best, and most likely outcomes, without downplaying the seriousness of this virus, I began to believe that social media fears have gone more viral than will COVID-19, causing more hysteria – and stimulus – than otherwise might have been and will be the case. Indeed, this coronavirus does not seem to be hitting the young, an observation that social media seemed to have missed as of last week but may be recognizing now. In the course of comparing COVID-19 to the common flu, most of us have gained meaningful perspective on the statistics: in the US alone, the winter flu typically impacts roughly 35 million people, nearly 10% of the population, and kills almost 35,000 people, disproportionately the elderly and the young.
In contrast, as winter draws to a close, COVID-19 has impacted fewer than 200,000 people thus far, not just in the US but globally, killing 7,000-7,500, disproportionately the elderly. In the US, it has infected fewer than 5,000, killing fewer than 100. That said, because COVID-19 hit US shores much later than it did Asia and Europe, with testing in earnest beginning just in the last week, the odds are high that negative headlines will persist for several more months.
While the mortality rate is higher than that of the typical winter flu, the total number of cases is likely to be much lower, not only this year as spring approaches in the northern hemisphere but also in the future for three reasons: the Trump Administration closed our borders to non-Americans from China in late January and from Europe in mid-March; Roche developed a test in record time  while Gilead and other biotech companies are repurposing anti-viral therapies to break the back of the coronavirus. Also encouraging is a recent study based on data from China and South Korea suggesting that chloroquine, a 75 year old generic drug developed for malaria, not only controls COVID-19 but also prevents it. Moreover, while this time could be different, viruses tend not to survive in warm weather, so the odds of sustained human and economic duress are diminishing. In addition, the precautions that consumers and business have taken to avoid COVID-19, especially now that state and local governments in the US are locking down their communities, could limit the number of cases and deaths associated not only with COVID-19 but also with the more traditional winter flu.
The Odds of a Global V-Shaped Recovery Have Increased
Given the extreme policy measures in force in China and elsewhere, the odds of a V-shaped global economic recovery from this short-term shock have increased, something considered impossible based on the behavior of equity markets globally during the last few weeks. Election year stimulus in the US already seems to have greased the skids.
For the past year, I have been struck by the dichotomy b