Corona-Virus Economic Impact

I typically like to write on Fridays, however, given how rapidly the economic conditions are deteriorating (along with the markets) as the hysteria spikes, this morning seems like a good time to send out some thoughts.

First, the virus. According to the CDC, 80% of people will experience cold or flu-like symptoms if they contract the virus. The remaining 10-14% will experience more severe symptoms and of those, 10-14% will experience critical symptoms. For those not following the math, 1-2% of those contracting the virus will experience critical symptoms. The United States has 1233 cases of Covid-19 as of this morning and 37 deaths. To put these figures in perspective, H1N1 in 2009 killed 280,000  and this year’s flu has killed 45,000. If you are older than 65 or have underlying health issues, especially lung related, you are in the higher risk group.

The NBA has postponed the remainder of their season. The NCAA has announced March Madness is now cancelled. Conferences and travel have been cancelled or dramatically curtailed. Major banks, Google, Twitter, and scores of other companies are having their employees work from home. Universities, including Ole Miss where my son attends, have cancelled ground classes and are moving online (BTW-my son gets an extra week of spring break while they figure this out, he's quite excited). Costco is out of toilet paper (I love that one and don’t quite get it). Without proper perspective and guidance, organizations are taking draconian measures and it’s having a major effect on the economy.   

Why is this occurring? Fear and misinformation. This is the first epidemic to occur during the social media age. The majority of Gen Z and Millennials do not subscribe to cable television. Most of their news comes from social media-Facebook, Twitter, Instagram, etc. As Abraham Lincoln once said “The problem with stealing quotes off the internet is you never know if they are genuine.” I have friends on Facebook who were constitutional scholars in January during the impeachment and are now global virologists. The point being, too many people are taking their cues from social media, and given the vacuum of leadership from the White House, the reaction has taken on a life of its own.

Although the virus has not made significant progress in the United States so far, the reaction is having a severe impact on the economy. Two weeks ago my recession probability jumped to 60%, today it’s at 90%. The impact on the hospitality, travel and entertainment business is breathtaking and this alone will have a ripple effect through the rest of the economy as these workers become either underemployed or unemployed. Retail is being impacted as shoppers avoid malls, yet crowd into Wal Mart and Costco to stock up on staples.

I’m anticipating a weak set of earnings for the first quarter, with significantly lower guidance (or no guidance) from companies for the second quarter and the remainder of 2020. A few companies may benefit during this period-some healthcare companies, Amazon (when you’re shut in, someone needs to deliver), Facebook/Google/Twitter/Netflix (as people stay home, they need something to do), Apple (device sales will be soft, but the higher margin services business should benefit), Zoom and WebEx (video conferencing), Grand Canyon (online education), etc. The majority of companies will suffer, especially those which are consumer facing.

Given our large cash position coming into February (17%), we are looking for a spot to put capital back to work. Given the speed at which the economy is deteriorating, and the market along with it, we are being cautious  but systematic. The fear factor is high in the market as evidenced by the VIX, which has spiked to 67 this morning, not far from a record high. Given the 25% correction in the stock market, this isn’t a horrible time to add to equities. The question is whether this will be a 4-6 week economic shutdown or a 4-6 month shutdown. If the former, the market has probably seen it’s worst moments. If the latter, we have another 10-15% to fall. For those looking for spots, legging into the markets makes sense and if you haven’t already done so, your first tranche should be now.

The federal government is discussing a number of ideas on the fiscal front to help stimulate the economy. In my view their efforts won’t be helpful in the short run without creating confidence that the virus is under control.  What could create a quick turnaround in the economy?  A government sponsored, mass testing program for the virus would be significant. Those with the virus could self-quarantine, those without could go back to their regular routine.

The Fed is active and will become more active as certain credit markets become impaired. (in fact, after I wrote this, the Fed added $500 billion in asset purchases) With a few exceptions, the markets have been functioning smoothly in spite of the mass selling. High yield spreads have spiked, BBB credit has collapsed, and treasuries have rallied-all normal responses for a slowing economy.

I’m happy to answer any questions. This is a fluid situation that we are monitoring closely. As an example, I have been reading hourly updates from the CDC to keep up with their latest thinking on the progress of the virus-now I’m a global virologist 😊

Have a great day and weekend.

Ned