The Economic Impact of Covid-19

Covid-19 is not the first pandemic.  Much more severe ones have occurred in history.  Others have hit us more recently.  We have come through them all.  Yes, the short-term economic costs of fighting this one are particularly high, but the economy, and your portfolio, will recover.  

Previous Global Pandemics

101 years before the Covid-19 outbreak began in China, another pandemic swept the globe: the 1918 influenza. Nicknamed the "Spanish flu" because it was first mentioned in Spanish newspapers, this pandemic surpassed the death toll of World War I, taking the lives of 20-50 million people during its two-year run. The Bubonic Plague (or Black Death) is the only widespread illness in recorded history to take more lives than the Spanish flu, approximately 60 million people, in a similar timespan.¹ These are worst-case scenarios that occurred before the development of modern medicine among populations that knew comparatively little about public health.   

More recently, we have had to face other pandemics.  Every year, seasonal flu strikes about 9% of the global population (1 billion people) on average, with roughly about 5 million severe cases and a death rate centered around .1% (varying from 291,000 to 646,000). Most Americans pay so little heed to the flu that they don't even bother to get a vaccination, even though they are offered for free. In 2009 a new (novel) strain of the flu arose, labeled H1N1.  It affected a whopping 24% of the global population, but most cases were mild, and the deaths totaled "only" about 284,000 or .02%.² 

The Novel Coronavirus (Covid-19)

It's too early in the development of the novel coronavirus (Covid-19) to know how many people it will affect, or what the death rate or count will be. The World Health Organization as of today (March 18, 2020) estimates that there have been about 180,000 confirmed cases with about 7,500 deaths.³  Most cases are mild or even symptomless,  Serious cases occur mostly among the elderly or people with respiratory or immunological conditions.  It is believed that the virus spreads through the air and on touched surfaces.      

At the beginning of 2020 the world watched the effects of Covid-19 play out in China. Then, cases started to pop up elsewhere, making it clear that the virus had not been contained. Its spread to other countries has varied in severity depending upon the response of each country's government and public in terms of steps taken to limit the spread of the virus.  More stringent measures seem to have been somewhat successful in slowing it down.  

There is currently no vaccine available, although that is usually the case with a new virus. For example, with SARS and Ebola, it took about a year to develop vaccines.²  Although some treatments may become available soon, a full vaccine for Covid-19 appears to be at least a year away.  

The greatest fear is that a rapid spread will result in an overwhelming demand for critical care hospital beds and particularly for respirators, as the most serious consequences of the virus have to do with respiration.  If the rate of spread can be slowed down, it is thought, the surge in demand for these health care resources will not swamp the supply.

The Economic and Market Effects of Covid-19

Widespread fear has gripped much of the public, and has driven some to extremes in order to feel a sense of safety.  The same emotion that inspires some people to hoard toilet paper causes others to want to sell everything and go to cash in their investment portfolios.  Panic has been on display in both the stock market and the bond market. The stampede to cash has gone to such extremes that it feels (to me) like we have reached the point of capitulation.  

The selloff in the stock market is not without a fundamental rationale, of course.  Who would have believed a month ago that the vast majority of workplaces would shutter?  That nearly all retail stores, restaurants, and public places of all kinds would be closed down?   

As the public's fear of the virus has grown, a demand for a vigorous response from government has grown along with it. Here in the U.S., the Federal Reserve was fairly quick to take steps to supply liquidity, cutting the Fed funds rate to near zero and ramping up other measures designed to pump cash into the financial system. Arguably monetary policy is not the best tool set with which to address the problem, but the Fed has done, and is doing, what it can to help. The full effects of driving interest rates to zero and buying massive amounts of government bonds are yet to play out, but over the long-term, the winners are likely to be owners of financial assets and the likely losers the savers who rely on interest rates for their return.

The response of federal, state, and local elected officials has been mostly one of "command-and-control," somewhat akin to the response of the Chinese government.  That is, rather than rely upon the the good judgment of those most at risk to make changes to lower the risk of catching the virus, and upon the cooperation of everyone else to make less drastic changes to lower the risk of spreading it, governments have mandated drastic and unprecedented changes for everyone.  

The costs have been and will continue to be enormous--well beyond anything that has ever taken place before.  Governments have mandated the complete shutdown of many sectors of the economy.  Job losses, bankruptcies, and other economic hardships are starting to mount and will probably continue to pile up until some assistance is granted by governments, either in the form of fiscal handouts, tax relief, low-cost loans, and other extraordinary spending measures, or in the form of easing of the draconian restrictions now in place, perhaps in response to indications that the coronavirus "curve" is flattening out.  

The Bottom Line

Covid-19 is not the first pandemic to occur, nor will it be the last.  The economic costs of the attempts to control it are beyond anything imaginable until very recently, but they too will pass.  Now is not the time to sell in a panic. In fact, expected returns are quite a bit higher than they were just a month or two ago.  Long-term investors will benefit from staying the course.