Wednesday Briefs – 18 March 2020

Check here every Wednesday for brief commentary on current events.

This week: Coronavirus; Fear virus; Markets; Democratic Primaries.

Please contact us for data or other information concerning the views below.

Coronavirus

The main news is not that the virus is spreading at a fast pace – this was predictable – but that there are new reasons to be optimistic. One is the slowdown to less than 20% in the daily growth of cases in some European countries including Italy and France. New countries of concern are the US, Spain and Germany where daily growth remains above 20%. But all are a couple of weeks behind Italy and will slow down in due time. Indeed, they will probably do so before reaching Italy’s levels (on a per capita basis) because social distancing was implemented at an earlier stage.

Meanwhile, efforts at finding remedies and a vaccine are accelerating. There are now at least three promising drugs being tested by pharma companies Sanofi, Regeneron and Gilead, and at least two vaccines in development.

We continue to believe that a bad-case scenario for the US would place the peak in cases between 100,000 and 200,000 this spring but that warmer temperatures will make the virus subside in April and May. Though the headlines will be unnerving for a few more weeks with rising numbers and falling markets, a bigger challenge may come in the fall if the virus returns. But time is on our side and there is every reason to hope that we will have better means to fight back by then, whether in the form of viral drugs or a vaccine.

Testing is a key factor for mitigating the spread right now. By the end of the month, US testing capacity will be about 100,000 tests per day. Assuming a 5% rate of positives, it would take at least ten days to identify 50,000 cases, ten days during which the virus would still be spreading. In our estimation, testing capacity needs to double or triple, and more effective pre-screening needs to boost the percentage of positives in order for us to get ahead of the disease.

Fear Virus

Many of the articles and posts that are circulating on social media are clearly intended to sow fear. These articles are purposely constructed and designed by tone and by syntax to provoke extreme fear or even panic. They often draw on or mention reputable sources but they either misrepresent the source or attribute to the source complete fabrications.

As was said by others, fear is another virus that spreads quickly and that can potentially be more dangerous and more deadly than the coronavirus. People who feel extreme fear for themselves or their loved ones can react in very damaging ways. If they organize in groups, the damage is quickly multiplied. Think of historical precedents.

By now, we all get social distancing and the need to flatten the curve. There is no need to pile on any more. Beating this pandemic is not only a question of luck, of seasonality, and of science. It is also a question of attitude. Optimism could look stupid for a few more weeks (hope not) but it will be an important part of getting us through in the end.

So if you see an article that riles you up or that terrifies you, understand that it is designed specifically for that purpose. Knowledgeable people are worried but do not spread panic. Please refrain from forwarding such posts.

Markets

The frenzied succession of big moves in both directions means that the markets reflect fair value even less now than they usually do. It is impossible to estimate fair value when 1) large segments of the economy are shut down and 2) nobody knows for how long they are shut down.

We are left therefore with scenario analysis, with thinking of various scenarios and assigning probabilities to each. In our view, there are two main outlying low-probability scenarios. One, optimistic, is a peak in cases within the next four weeks, say before April 15, followed by a retreat of the virus in the spring. The second, pessimistic, is a non-seasonal profile and a continued rise in cases through the spring and summer. But the most probable scenario is a peak in cases in the next two months followed by a seasonal decline. In this case, the stock market, as a discounting mechanism for activity that is three to six months ahead, has already made a bottom.

Democratic Primaries

Now that Joe Biden has all but secured the majority of delegates, the speculation turns to the vice-president stakes. Because Biden has indicated that he will choose a woman, it is natural to consider the possibility of Warren, Klobuchar or Harris on the ticket. Of the three, Warren is probably the strongest. She would bring some of Bernie Sanders’ voters into the fold and would appeal to college-educated suburban women. She is not as strong with minorities but Biden has shown that he is.

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