Season Investments


Well That Escalated Quickly

Posted on February 25, 2020

"Boy, that escalated quickly…I mean, that really got out of hand fast!” – Will Ferrell as Ron Burgundy in Anchorman

2020-02-25_boy-wearing-surgical-mask.jpgYesterday and today were bad days for the global stock markets with all three major US stock indexes down over 6% cumulative. Although on any given day there are a myriad of things that move the market one way or the other, it’s fairly safe to say that the biggest factor contributing to the recent sell-off has been news about the coronavirus, which was first detected in Wuhan City, China toward the end of last year.

The coronavirius, which has now officially been named by the World Health Organization (WHO) as “Corona Virus Disease” with the abbreviation COVID-19, has been making news for over a month now but during that time most major stock indexes have continued to climb to new record highs. So what changed yesterday and to a lesser extent on Friday and today? No one knows for sure, but one could postulate that it was the jump in reported cases of COVID-19 outside of mainlaind China. The chart below from worldometers shows the number of reported cases outside of mainland China made a new high on Friday and then another significant jump up over the weekend.


Of the countries reporting COVID-19 cases, South Korea and Italy have been the most effected. Each have seen a rapid increase in the number of cases and are taking dramatic measures to stop the virus from spreading including travel bans and quarantines.


As a bit of a side note, there is a good amount of misinformation floating around the internet (particularly on social media) about this virus, some of which is based on bad statistics. As a lover of all things statistical in nature, I wanted to take a small sidebar to set the record straight. Some people are contending that COVID-19 is very similar to and actually less deadly than the influenza flu virus by comparing the number of people that have died from COVID-19 to the flu. The problem with this comparison is the total disregard for the base rate. Simply put, more people have contracted influenza than COVID-19 which is why there have been more deaths.  

Although the symptoms of COVID-19 mirror those of the flu and disproportionately affect the elderly and those with comprised immune systems like the flu, COVID-19 is almost twice as contagious as the flu (each infected person infects an average of 2.2 other people compared to 1.3 for the flu) and is much more deadly. According to this article referencing CDC data, about 0.05% of people who caught the flu died from the virus in the US this season. In comparison, the death rate for COVID-19 is estimated to be around 45x higher at 2.3%, but even this understates the true morbidity rate because it compares the number of deaths to the total number of those infected rather than those cured. It’s still too early to tell where the actual death rate will “level out” but when you compare the number of deaths to the number of cured patients, the death rate stands closer to 9.0% or 180 times more deadly than the flu. As a disclaimer, we are comparing US and Chinese data which have different healthcare systems and data integrity standards, so there is definitely a margin of error in these statistics, but the difference is large enough to prove the point that COVID-19 is much more than simply a new strand of flu virus.


Getting back to the topic at hand, what does the spread of COVID-19 mean for the global economy and major equity indexes? The transportation and travel industries have obviously been impacted by the spread of COVID-19 as various travel bans and quarantines have been put in place to try to contain its spread. It’s too early to tell what the ultimate impact will be on the global economy, but the fact of the matter is that we live in an interconnected world of global trade and supply chains. When production is halted on a widget made in China the impact can be felt by companies and industries on the other side of the globe. Oxford Economics estimates that if COVID-19 turns into a full blown pandemic, it could knock off 1.3% of global GDP or roughly half of global GDP growth.

So the next question to ask is whether or not the sell-off in the stock market over the past three trading sessions has been an under or over reaction to the threat? One could argue that the market was “due” for at least a small correction with bullish sentiment at elevated levels before Friday’s trading session. Also, if we look at other viral outbreaks as a potential roadmap for the future, the S&P 500 fell by 12.8% over SARS in 2003 and 12.9% over the Zika virus at the end of 2015 and into 2016. As of today’s close, the S&P 500 is around 7.8% off of its recent high, which would lead us to believe that we might not be all the way through the current sell-off.

But just because the market may not have bottomed, doesn’t mean that everything is all doom and gloom. Government health organization are not taking this virus lightly and are doing everything in their power to contain it from spreading further. And it appears to be working! Again, looking at data from, the total number of active and serious/critical cases have actually begun to decline over the past week even though the spread outside of China has picked up in recent days. Again it is too early to tell what the final impact of COVID-19 will be on the global or any one particular economy (although it is safe to say that it will have the largest impact on China’s economy), the most likely outcome is that it has a minimal impact on the long-term trajectory of global GDP growth.

Lastly, we would be remiss if we didn’t use this opportunity to yet again pound the diversification drum. It is easy to be lulled into complacency when the stock market grinds higher with little to no volatility, but days like the past three are a good reminder of why we hold things like bonds, gold, and what we call alpha strategies in the portfolio, all of which are either close to flat or slightly up over the past three trading sessions. Holding a variety of assets that are not highly correlated to each other, smooths out the ride, reduces volatility drag, and increases the odds that investors won’t make an emotional, knee-jerk reaction to sell assets at an inopportune time. In summary, diversification helps investors stay the course when risk seems to be escalating quickly

elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.

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