March 2, 2020: The Risk Of Coronavirus Outbreak | Better Financial Future -- MyPlanIQ

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The Risk Of Coronavirus Outbreak

Now that the coronavirus or Covid-19 (official name) finally started to rear its ugly head in the US and the rest of the world outside of China, it has caused widespread confusion, fear and/or complacency. In this newsletter, we try to summarize what we know and discuss its implications to financial markets and economy.

A disclaimer: by no means we are the professionals in healthcare field. The following discussion is drawn upon some (hopefully) credible sources and we are doing our best to be objective and rigorous.

The new coronavirus outbreak: this is not a flu

Currently, we see two extremes of opinions. On one extreme, people think this is a very serious disease that has many scary unknowns (such as whether there will be a vaccine, whether there will be a cure and whether there will be permanent damage even for those who are cured, etc.). From the chaotic response in the early outbreak in China and now in other regions to the sometimes very high fatality rates (such as the one in Iran and in Hubei, China, the epic center of the initial outbreak in China), these people hold a very gloomy view.

On the other extreme, many people in the US just treat this as yet another flu like disease. This is especially true for those who are young. So life goes on without much change for these people. In fact, this is the opinion or behavior of the majority in the US so far.

Here are what we can summarize from the information gathered so far:

Mortality rate: seasonal flu ranges from 0.01% to 0.1% vs. coronavirus 1-2%. See for example, the New York Times article. However, as this is still in the early stage of the development, some have argued that in an optimistic case, the mortality rate can turn out to be as close as 0.1% or that of the severe seasonal flu. See the article by Dr. Fauci, director of NIAID (National Institute of Allergy and Infectious Disease). But again, this is only a possible scenario.
Transmission rate: unfortunately, unlike seasonal flu, Covid-19’s R0 (so called reproduction rate) is 2.2, meaning on average, a virus carrier can infect 2.2 other persons. In comparison, R0 of a seasonal flu is about 1.3. The R0 of 1918 pandemic was about the same as that of the new coronavirus, perhaps higher. Nevertheless, this outbreak can become extremely wide spread if little containment and prevention is adopted.
Vaccine: unlike a seasonal flu, no vaccine so far for Covid-19.
Cure: no cure so far for Covid-19. What’s known so far is that it becomes more deadly for people with some underlying medical conditions and older people.

The following are some statistics from worldmeters:

Death rate

AGE	DEATH RATE confirmed cases	DEATH RATE all cases
80+ years old	21.9%	14.8%
70-79 years old		8.0%
60-69 years old		3.6%
50-59 years old		1.3%
40-49 years old		0.4%
30-39 years old		0.2%
20-29 years old		0.2%
10-19 years old		0.2%
0-9 years old		no fatalities

Death rate by pre-existing medical conditions

PRE-EXISTING CONDITION	DEATH RATE confirmed cases	DEATH RATE all cases
Cardiovascular disease	13.2%	10.5%
Diabetes	9.2%	7.3%
Chronic respiratory disease	8.0%	6.3%
Hypertension	8.4%	6.0%
Cancer	7.6%	5.6%
*no pre-existing conditions*		0.9%

We want to point out that for young people, the death rate 0.2% might seem to be close to the overall death rate of a serious seasonal flu. But that’s not entirely an apple to apple comparison. In fact, even for a mild seasonal flu, the death rate of young people is also much lower than the overall death rate based on the following chart.

In general, even for young and healthy people, we can make the case that the death rate is probably several times to an order of magnitude higher than that in a seasonal flu.

On a separate note, since many of our readers are older folks, we hope everyone take necessary preventive measures based on her/his own medical conditions. Stay safe!

Impact on economy and financial markets

As increasingly more and more infected cases have been reported in the US and in Europe, financial markets have behaved violently. This is again expected as we all know that markets are just trying to make trial and error guesses everyday. The trial and error approximation is usually amplified real time in stock markets, causing huge swings in both up and down directions.

What’s not explicitly known this time is that this is an epidemic (and probably will become a pandemic soon) caused by a virus that’s still known little. The psychological and containment effects will be quite different from a normal economic/financial crisis.

This process is distinct as it will drag on for a while with daily bad news continuously reported for a while. One can see what happened in the past one plus month in China: bad news first surfaced and then more bad news pile up. Unlike China, the US and Europe are probably adopting less draconian containment measures which in turn will prolong this bad news process for a while. A reasonable guess is that it probably will take at least a month or two to reach a pivot or turning point.

As more bad cases and news coming, consumers and companies will adopt more stringent measures for safety. Some of these can be overshoot (just as in any other situations) and some of these can be amplified by news, causing panic. So one can expect that the economy activities will be seriously affected in this first phase. As the financial impact of these measures usually lags behind, one will see more bad economic and financial news will be reported in the coming several months.

Note that even in the most optimistic scenario depicted by Dr. Fauci (i.e. it becomes a drag on serious seasonal flu type of disease), the above still holds as it will take at least several months to finally understand the epidemic. Furthermore, even in this scenario, to combat the wide spread, prevention measures will be adopted. Some of these measures, especially those adopted early on, can be stringent enough (as even if this good scenario becomes true, it will only become clear in some later days) to affect the economy.

In a word, we expect economy will take a hit and regardless whether or not this will cause an economic recession, financial markets will take a wild ride in the process.

Market overview

Last week, stocks were hit hard. S&P 500 and other major indices all corrected more than 10% from their record highs. What’s unusual for this ‘correction’ so far is the consecutive non-stop daily loss: for example, S&P 500 lost every day for seven days from 2/20/2020 to 2/28/2020. Such a continuous loss reflects on a stream of bad-news-more-bad-news process mentioned in the above. Of course, these consecutive losses will be interrupted by reflexive reversals, as the one witnessed this Monday. Unfortunately, we believe markets’ behavior in the last week is just the early start of this process.

Given stocks are still highly overvalued and markets are actually still overextended in a longer timeframe, we believe more volatility will ensure. Again, we call for staying the course.

For more detailed asset trend scores, please refer to 360° Market Overview.

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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