Our base case for the recent Coronavirus scare out of China is that it will loosely follow the script of previous pandemic scares. These include the SARS outbreak in China in 2003-2004, the 2012 MERS scare and the Ebola outbreak in 2014-2016 . At the time, each received overblown media coverage and even exaggerated pronouncements from global health officials. In October 2014, representatives of the World Health Organization forecast new cases of Ebola in the tens of thousands per day. In fact, the virus had already topped out in the low hundreds per day. In the end, all three of these were contained and had only limited effects on the global economy and financial markets.
For perspective, be reminded that the flu itself is a form of the coronavirus. Preliminary estimates from the CDC are 80,000 U.S. deaths from the flu and its complications last winter. This was the highest total in four decades – well in excess of the 12,000–61,000 annual deaths from 2010 through 2017. However, to the best of our knowledge there was never a measured negative economic effect reported, nor many who are even aware of the statistic. In a populous country such as the U.S. (or certainly China), deaths from contagious diseases are an unfortunate fact of life. Reassuringly, in the case of the new morph of the coronavirus it appears China’s response is much quicker than their plodding attempt at halting SARS. In the end, 774 deaths were eventually – certainly a tragedy, but a rather small outcome for a condensed population of 1.4 billion. Also of note, to date the death rate from the new coronavirus is significantly lower than for SARS, with a mortality rate to date of 2.5% versus 9.5% for SARS.
Although the negative health consequences of coronavirus do not seem significant, in the short term it is quite likely the financial market reaction will exceed the true economic cost. Financial market outcomes are the result of investor behavior (i.e. “crowd think”), and panicked investors tend to act irrationally. The resulting mispricing creates buying opportunities.
Ironically, as long term investors we are actually a bit encouraged by the recent unrest in the stock market. Valuations had become quite stretched, with the forward P/E of the S&P 500 stretching to a taut 18.7x before the sell-off. We were hopeful for an opportunity for the near-mania to subside and for the market to take a rest, providing time to digest last year’s outsized returns and offering profits an opportunity to “catch up”. We feel for the unfortunate victims in China, but this may also provide the market a reason for a healthful pause.