• Chip Barnett

Outbreaks and Breakouts

2019 was a very good year for investors, with stocks up about 30% and bonds up about 9%. It wasn’t because there was a lack of drama on the geo-political stage; it was largely because the underlying conditions (earnings growth, low interest rates and stock buybacks) were favorable. Looking ahead, GDP growth remains positive, but modest; unemployment is historically low, median wages are up, and inflation is a non-issue at around 2%. These all bode well for now. Let me draw a parallel from last year to explain why I think the coronavirus scare and the continuation of the underlying conditions are likely to make for another good (but not as strong) 2020. Remember in December 2018, when non-essential government employees were “shut down,” well into January 2019? The negative headlines were everywhere, the first three weeks of December were no fun in the stock market, and everyone felt blah over the holidays. By the 3rd week of January (2019), there were rumors the air traffic controllers would protest and strike, and the shutdown ended within a few days. The speculation was that an inefficient transportation sector would really pinch the economy and imports and exports would slow to a crawl. Within a couple weeks of the shutdown ending, what had been an outbreak of bad news had led to a breakout for stocks. Investors quickly got over all the hubbub of December, and stocks finished the 1st quarter up 13%. They never looked back the rest of the year. The coronavirus is playing out similarly. China has intentionally made its transportation inefficient, preventing travel into and out of several major cities (though not Beijing or Shanghai). Like our shutdown 13 months ago, investors and economists are concerned with China’s production of goods and transportation of finished goods and how they will affect the Chinese economy and the continuity of international trade. Now, I’m no epidemiologist or immunologist. Government shutdowns due to political differences are apples compared to the oranges of municipal shutdowns due to potential viral contagion. However, I think this too shall pass. As of January 29, China has closed down 50 million residents’ ability to move freely, there are about 6100 confirmed cases of coronavirus infection, and the death toll is 132. Taking a grain of salt with how honest China is with its counts, this suggests a low mortality rate. When you think about the population density and the struggle to get patients in hospital beds, this wave of illness and the proportion succumbing, it does not, seem, likely to be a pandemic. I think it will spread to many more people before it is under control, but I think soon investors will be looking beyond it. On the following page is a helpful table I found. I’ve listed the web address for the supporting data at the end of this letter. It’s been compiled using CDC and WHO data. The type is fine, so I scaled the table up as much as I could. If you look to the top right of the chart, you can see the color-coding for transmission via bodily fluids, bites and airborne.

Note the y-axis scale on the left. It’s not logarithmic, but the intervals start at 0% mortality, then the next increment is 0.1%, then 1%, and then it goes from 10% to 100% in increments of 10%. Contagiousness, on the bottom x-axis, is measured by how many other people one infected person is likely to infect. According to this data, this strain of coronavirus is less dangerous than SARS, Yellow Fever, Ebola or Bird Flu. I am certain the numbers of infected and deaths will rise. But I am confident that this outbreak too will be tamed, and that there will be a negative but temporary economic impact. But the underlying conditions remains favorable, and while I think there will come a time this year to re-balance the portfolios, I won't be surprised to see stocks recover in the intermediate term. Chip

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