The 2019-2020 coronavirus pandemic is growing exponentially. Thousands of new cases are confirmed daily. Hundreds have died. Medical professionals and scientists are scrambling to identify how deadly the coronavirus is, how contagious, how it spreads, and what mechanisms, including vaccines, are effective at containing the outbreak.
Pandemics have an Impact on the Economy
The coronavirus pandemic also has a monetary impact. Factories in China are closed. Tourism has come to a standstill. Stock markets and commodities have sold off. While China is ground zero of the pandemic, the economic and financial impact is global because of how integral China is to the global economy.
According to Capital Economics, China comprises close to 20% of the world’s economic output as measured by GDP. Chinese exports are 14% of the world’s total while 15% of the world’s air passengers are from China. The longer Chinese factories are closed as part of efforts to contain the spread of the virus, the more global supply chains will be impacted and the greater the economic and financial toll.
The good news is while the coronavirus fatality rate—2%—is higher than the fatality rate of the common flu, the coronavirus is less lethal than other recent pandemics where fatality rates ranged from 8% to 50%.
How Stocks and Bonds Performed During Prior Pandemics
In prior pandemics, the stock market fell leading up to when the World Health Organization (“WHO”) declared a health emergency. Once a health emergency was announced, stocks bottomed and began to rise. Likewise, interest rates fell prior to when a health emergency was declared by WHO and then stabilized.
Economic growth slows during pandemics as it will during this one, but the historical pattern is once the pandemic is contained, economic growth rebounds to its prior trend line.
What Should Investors Do About the Pandemic
David Heymann of the London School of Hygiene and Tropical Medicine stated we are in the “fog of war phase” of the coronavirus pandemic. There are still many unknowns. The typical pattern is financial markets and economies settle down once there is greater clarity, but each pandemic is different so it will take weeks or even months before investors can stop fearing the worst.
In the meantime, the financial carnage has been modest to date. Global stocks, including emerging markets, have sold off less than 5%. Stock market valuations were above average prior to the pandemic and the sell-off has not been sufficiently severe for bargains to emerge. Consequently, investors should take a wait-and-see approach until there is more clarity about the pandemic rather than significantly increasing or reducing portfolio risk.
Money For the Rest of Us Podcast Episode 286 takes a closer look at how the current coronavirus pandemic compares to earlier pandemics.
Topics covered include:
- Definition of a pandemic
- The worst pandemics in the 20th and 21st centuries
- What are the factors in determining the severity of the coronavirus’ impact
- What are the economic ramifications of the coronavirus.
- How did financial markets perform during previous pandemic episodes.
- Are there portfolio changes investors should make in response to the coronavirus
Welcome to Money For the Rest of Us, this is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host David Stein. Today’s episode is 286, it’s titled “Coronavirus the Financial Impact of Pandemics.”
The Coronavirus, the most recent novel strain was first reported in late December, now it is growing exponentially. Financial markets are reacting, bond yields have fallen, stock market has sold off, there is a great deal of uncertainty in terms of the cost to human life. In this episode, we are going to look at what has been the financial impact of prior pandemics. What is done about it, why is there so much uncertainty, and should there be something we do in terms of our investment portfolio given what is going on right now.
A look at modern pandemics
First: the difference between an epidemic and a pandemic is an epidemic is “a sudden increase in the number of cases of a disease generally within a specific geographic area.” Whereas a pandemic is “an epidemic that has spread over several countries and continents.” That’s according to the Centers for Disease Control and Prevention. The Coronavirus, now that it has spread to more than I believe 10 countries, it’s a pandemic. Most of the cases, the vast majority of cases, are in China.
The largest pandemic in the modern era was the 1918 Influenza pandemic. It was caused by an H1N1 virus with genes of avian origin. It’s estimated that about 500 million people or one-third of the world’s population was infected with this virus. 50 million worldwide deaths, about 675,000 in the U.S. The mortality rate if you got the disease: 10% of those that caught this flu virus passed away. That was 1–3% of the world’s population; it was made worse because there was no vaccine, no antibiotics. So all that could be done was to isolate, quarantine, limit public gatherings, and personal hygiene like washing hands.
To put that into context just under 1% of the world’s population dies each year, most from natural causes, but during the flu pandemic in 1918 up to 3% of the world’s population died just from that disease.
Now there have been other pandemics since then—1968 influenza A that H3N2 virus. 1 million people worldwide caught this virus 100,000 in the U.S. and about .03% of the world’s population passed away. So much lower than in 1918 when it was 1-3% of the world’s population. In 2009 there was another novel influenza A H1N1 virus known as the Swine Flu 61million cases in the U.S. 12,469 deaths so the mortality rate 0.02% versus 10% for the 1918 Influenza pandemic. Roughly 130,000–500,000 individuals passed away around the world .001% of the world’s population.
We’ve had some pandemics. Now there are other virus-related epidemics. The SARS which is most closely related to the current Coronavirus that broke out in 2003. 8,000 cases but the fatality rate was 9.6%. The MERS virus in 2012 was about 2,500 cases, fatality rate 34% that originated like SARS in East Asia. Ebola, 2014 29,000 cases 50% fatality rate, and the Zica virus in 2015 over 100,000 cases the fatality rate was 8.3%.
Pandemics are just part of life, they’re unfortunate. Many of them arrive, such as the current Coronavirus from interaction with animals. The Economist reports that the virus probably originated with bats and passed through mammals, many of which were in Wuhan’s wet market.
Wuhan is the city where the virus was first detected. A wet market is a market where wild animals are sold and they are slaughtered on the premises.
Last Thursday, January 30th The World Health Organization declared a health emergency related to the Coronavirus. Their most recent situation report, dated February 3rd—I’m recording this on February 4th—had 17,391 confirmed cases. 17,238 were in China, so 153 outside of China. Of those 17,000+ cases in China about 2,300 were considered severe and there have been 361 deaths in China. There has been 1 death outside of China. The mortality rate is 2–2.5% at this point, but as David Heyman of the London School of Hygiene and Tropical Medicine stated: “We are in the fog of war phase of this particular disease”.
What the World Health Organization and other medical staff and scientists are trying to determine is how bad it will get. And to do that they first need to know how deadly it is, what is the fatality rate, right now it has been 2—2.5%. Some models such as worked by Gabriel Leung and Joseph Wu at the University of Hong Kong suggest that—this as of January 25thas reported in The Economist—that the number of infections in Wuhan is closer to 44,000. This means many of them are mild in which case the fatality rate could be much less as low as 0.1% .01% would be about as deadly as the common flu in the U.S.
On that note, CNBC reports that this flu season there have been 19 million cases in the U.S., about 10,000 deaths, which equate to a mortality rate of 0.05%. Now medical professionals and scientists are trying to figure out how deadly the Coronavirus will be and then how contagious. And that will be determined as those that are sick arrive at hospitals and they can see what patterns emerge in terms of how people became infected. For example, the Economist points out if most of the newly infected people are healthcare workers or relatives of the sick that would mean the virus isn’t necessarily transmitted by casual contact, got to be much more close proximity. They want to see how it spreads and what treatments and prevention mechanisms work to contain the pandemic.
The recent situation report by the World Health Organization, they write they “are seeking to address crucial unknows regarding clinical severity, the extent of transmission and infection, treatment options, and the ability to accelerate the development of diagnostics therapeutics and vaccine.” So they are working on that but right now we don’t know how severe it will be from a health standpoint because they are still trying to determine how deadly it is, how contagious, how it spreads, and what treatment mechanisms work the best.
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