A Quick Market Correction, An Inverted Yield Curve, and a Corona

March 1st, 2020 by 

Last week was an interesting week.

Fears of the novel coronavirus's spread started coming to a head, and the US stock markets crumbled. As recently as Wednesday, February 19, 2020, the S&P 500 touched an all-time high of 3,393.52.

On Friday, February 28, it closed at 2,954.22, down 12.9%.

What Does the S&P 500's Fall Mean?

In the quite-recent past, we've talked about corrections on the S&P 500, and even brief bear markets. By most definitions, we're already into correction territory – and reading between the lines, there are a few plausible reasons why beyond a virus.

From peak, this was the fastest ever correction: -10%+ (Torsten Slok, Deutsche Bank)

Taking the stock market's fall independently for a second, expectations of fundamentals have changed. If SARS-CoV-2 breaks out to a pandemic (and it's getting close as of tonight, Sunday, March 1, 2020), it can affect both the supply side and the demand side:

Is it temporary? 

Yes... well, some of it.

Whether SARS-CoV-2 eventually infects many of us, or its stopped (🤞, but I doubt it at this point), some damage has been done. There will be echoes for years to come – for one example, will companies reconstruct their China supply chains in the same way in 2021?

I don't necessarily predict demand will be depressed for a while, but things are going to play out in ways that few people saw coming. And that means, as with all changes, there will be winners and losers.

Some Notes on 2019's Novel Coronavirus

This is not the flu, despite the narrative that took hold soon after SARS-CoV-2's existence was broadcast worldwide.

What's the biggest concern with SARS-CoV-2?

In my mind, the biggest concern with SARS-CoV-2 is everyone gets sick at once. As an American, I'll do the math on the US – but run the numbers for your own country.

One Chinese paper estimates that ~ 81% of COVID-19 cases (the disease SARS-CoV-2 causes) are "mild." Assume that the number is a bit low, and "only" 10% of cases need a clinic or hospital and 90% are mild. A quarter of those 10% need critical care from an ICU.

Here's backup:

The United States has only ~ 1,000,000 hospital beds, and a mere 100,000 ICU beds for the sickest patients (think: respiratory support).

At least one epidemiologist from Harvard, Dr. Marc Lipsitch, estimates 40-70% of people will eventually get COVID-19. Take the low end at 40% and assume 20% of cases (like flu) have little to no symptoms and we'd never see them. You are still looking at 10 million seriously sick and 2.5 million critically ill.

If everyone gets sick at once, there just won't be enough beds to go around! Even assuming no one gets sick with things other than COVID-19.

Our only chances are to stop or contain this, flatten the curve as much as we can, or hope and pray the numbers are wrong. If we don't, people could die that otherwise would have lived due to lack of bandwidth in the health system.

What can you do about the situation?

Presumably – and this might be quite the assumption – the economic damage will reverse, post-coronavirus. Assuredly, there will be weird side effects to supply chains, personalities, collective consciousness, and every other thing under the sun. But yes, this too shall pass – at least economically.

And the economy *is* good right now, unchecked viral spread aside. Unfortunately, that side is bad – many people have died (~3000 confirmed at press-time) and will die of COVID-19.

If you're reading this, you're probably 25-64 years old, high earning, and have a sizable say in your family's finances. Odds are, unless you have serious comorbidities, COVID-19 isn't as dangerous to you as it is to others.

That doesn't matter. If you are able, you should do what you can to avoid contracting the disease as long as possible.

Yes: you stocking up, practicing good hygiene, and doing whatever you can to delay the peak, in turn, helps the vulnerable population.

If you are "prepping," that might mean one fewer person spreading the disease, one fewer person occupying a hospital bed, one fewer person burdening the system when times are troubling.

And that's not just PK-the-engineer speaking:

We're probably all going to either get this virus or at best make it until next year, where we might get the vaccine. Do your part to push this out as long as possible – if not for you, for the more vulnerable among us... your family and friends included.

Wash. Your. Hands.

So – do your best to delay getting COVID-19 as long as possible. Flatten the infection curve, reduce the burden on the system, and we'll come out of this cleanly.

On the investing side, don't make any sudden moves. At this point, I'm assuming COVID-19's effects are temporary, and the economy will mostly recover to where it was – oh, two weeks ago. Expect central banks to see this as well and provide the help they can, but ask yourself how you feel with your current allocation.

If you can shrug off a wild drop like we've seen, you're probably on the right track. But if you have lingering doubts, next time the markets calm down, you need to reevaluate your investments. (Don't do it now with the stress of the current conditions, though!)

This too will pass. Stay healthy out there, and talk soon.

Don't Quit Your Day Job...

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