Wednesday Briefs – 11 March 2020

Check here every Wednesday for brief commentary on current affairs.

This week: Coronavirus Estimates; Oil and Markets; Election 2020.

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Coronavirus Estimates

The virus continues to spread around the world, with Italy becoming the new country of concern. The growth in total cases seen in South Korea and Italy in late February is now clearly visible in other countries such as France, Germany and the US. This is in large part the result of more testing. The actual number of infected is difficult to determine in most places.

One way to estimate it is to divide the number of dead + the number of those in critical condition by the South Korean dead + critical rate. The reason South Korea seems like a fair benchmark is that testing has been most extensive there. As a result, their number of confirmed cases seems closer to reality than in other countries. The number of dead + critical divided by the number of confirmed cases is currently 1.5% in South Korea.

Applying this to other countries, we estimate that the total number of cases would be 200,00 to 400,000 in China, 70,000 to 100,000 in Italy, 20,000 in Iran, 10,000 in Spain, 8,000 in France, 2,000 in Germany, and 3,000 in the US. A large majority of these cases are benign and/or already recovered. These figures can and likely will change significantly with more testing and with more time.

It is worth noting that the South Korea rate would only be valid in a non-stressed situation, in other words a situation where hospital care is still available for any person who needs it. If the numbers rise significantly, this becomes less true and the fatality rate would end up higher.

The example of South Korea also offers some comfort because it was able to curb the growth in cases around the 10,000 cumulative mark, a minuscule figure if it holds.

Oil and Markets

The oil war started by Saudi Arabia creates pain for producing countries that need an oil price well above $30 in order to balance their budgets. The IMF estimates Saudi Arabia’s breakeven price at $78, more than double today’s oil price. Russia’s is estimated lower at $42. A return to negotiation may not lead to an agreement soon because both countries can draw on significant fund reserves until the price of oil rises again.

Nonetheless their budgets are not their only concerns. It is not a stretch to assume that Russia and Saudi Arabia would both prefer a President Trump to a President Biden in 2021-24. Between Trump and oil at $50+ or Biden and oil at $30, they would opt for the former. We should expect a deal in the next two months, unless Joe Biden’s surge has convinced them that Trump’s chances are now greatly impaired. (More on this below).

Looking at the broader market, it is a given that corporate earnings will take a hit in Q1 and Q2 but, with some luck with the virus, Q3 will see a big rebound in activity and a market recovery. The stock market rose quickly after Pearl Harbor and after 9/11. The Dow was up 10% in 1918, the year of the Spanish Influenza (after being down 22% in 1917) and it was up 30% in 1919.

There is near unanimity among market strategists that the bottom is 10 to 15% lower than today (for the S&P 500) and 25% to 30% off the February record high. Since unanimity is almost always wrong, we can speculate that we have either seen the market low on March 9th, or that it will be in fact 40 to 50% off the February highs. In other words, either the virus will merely be crippling for a couple of months but largely gone by summer, in which case the S&P has suffered enough and we should start discounting the second half. Or the virus will be devastating for longer and the market will eventually trade much lower. We believe in the former scenario because of the probable seasonality of the virus and the many actions taken to mitigate its impact.

Election 2020

Joe Biden’s comeback on Super Tuesday and yesterday makes him the presumptive nominee. As things stand now, with markets in a spin and given Trump’s razor thin margins of victory in several swing states in 2016, Biden would sail through to be the next President of the United States. But it is a long way to November and the administration will spare no effort to revive the economy and the stock market.

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