January 27, 2020

Markets are down this morning as a result of China’s response to the 2019 – nCoV virus or “coronavirus.”  Our analysts have spent the weekend reading through various reports, and we have compiled our best thinking on the matter.

  • To date, the spread and mortality of the disease is similar to SARS. Most critical cases have both a direct connection to a specific fish market, and prior health problems.  All US cases are linked to Wuhan travel. Read More: The Lancet
  • Markets tend to overreact to scary new things, particularly those that have pandemic potential. But statistically there are at least 8 more likely leading causes of death before one gets to flus & virused. Read More: Healthline
  • At the same time, the Chinese government has reacted much more strongly than it did during 2003’s SARS outbreak (a market low). Reports estimate that they have quarantined over 50 million people in Wuhan and other locations via restrictions on travel.
  • We believe that this shutdown response, not the real health risk, is creating the market’s current dislocation. According to estimates, the restrictions will knock 1.2% off Chinese GDP.  Given the disease has a 14 day incubation period, we suspect markets will struggle with this heavy handed response for 2 to 3 weeks.
  • The heavy response and the controlled nature of the Chinese government, however, does create questions for those that follow military blogs. Wuhan was the location of one of China’s new BSL-4 Labs (the highest level Biosafety Laboratory).  The biolabs in Beijing have an unfortunate history of multiple escapes of the SARS virus. This is not reassuring when one considers the heavy response.  It creates a natural – what do they know that we don’t? Read More:

Finally, we view the market’s sell-off as a healthy sign, as it shows rational thinking and concern.  A more market concerning response would be to see the markets adopt a fatalistic and speculative response. This was the case during one of history’s largest financial market bubbles (the Dutch Tulip Bubble) which occurred in near proximity to a severe outbreak of the plague.

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