COVID-19 Puts Stocks In Intensive Care

Summary

• Growing fears of the spread of a novel coronavirus, now named COVID-19, crushed the market last week.
• Equities had their worst weekly performance since the financial crisis as the major indices are now down some 15% from recent highs.
• Stocks had rallied into overbought status before these latest worries, but the big sell-off is being fueled largely by the 24/7 news cycle and social media.
• Investors need to keep calm, have a game plan, and remind themselves the domestic economy still remains robust.
• Our observations of last week and updated COVID-19 investing strategy are presented below.
• I do much more than just articles at The Biotech Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Lunacy is when you can't see the seams where they stitched the world together anymore."- Stephen King as Richard Bachman, Rage

The sour tidings of the 'Ides of March' seemed to have come early this year as equities had their worst weekly loss since the depths of the financial crisis in 2008. The trigger for the decline was growing worries about the spread of the Wuhan coronavirus, which is also now known as COVID-19, which sounds like a title of a Stanley Kubrick movie.

While this outbreak has seen few deaths outside of China as of yet, it has spread to myriad other countries, most notably, South Korea, Japan, Iran, and Italy. Over 200,000 flights have been cancelled since this virus started to make headlines, mostly to and from China. Global supply chains are being impacted, and American multinationals like Apple (AAPL) have shut many operations in China. Japan is closing its school system entirely for the time being, and some factories in Italy and South Korea have been shuttered. New travel restrictions are being issued, and this will probably be a trend in the coming days and weeks.

This spreading global fear of a potential pandemic has hit world stock markets hard last week. Since hitting all-time highs on February 20th, the S&P 500 has dropped some 15% and is now deep in official 'correction' mode. Many sectors of the market have already entered 'bear market' territory, including most of the energy sector, other commodity-related areas and transports such as airlines.

In short, the market has turned incredibly ugly on a dime as hysteria (aided by a 24/7 news cycle and social media) has spread quickly across the planet.

However, it should be noted that the current domestic economy is quite strong. As noted in my post the other day, we got some very solid economic readings Friday, including.

• February Consumer Sentiment came in slightly above expectations.
• Chicago PMI levels were much higher than the consensus and hit six-month highs.
• January Personal Income growth came in at 0.6%, twice the 0.3% projections.

Here is my anecdotal take on the domestic economy based on a walk around New York City in frigid temperatures Friday night. Every bar and restaurant I passed was packed on a cold and windy February night. My favorite dive bar where I met a friend, and where one can almost always can find a seat, was three deep. Jeannette, who I was meeting for dinner later, was in a panic because she couldn't find a single open reservation at a dozen different restaurants on OpenTable. Fortunately, I ducked into my favorite Italian restaurant, where I know the owner, on the way to meet my friend at the bar and managed to snag a place for two hours later, at the counter! We enjoyed branzino, duck ragu and tiramisu in what was a completely packed and very loud west village hangout later in the evening.

Now, given that Wall Street just got absolutely crushed last week, you would think the one place that might be showing some discretionary consumer spending caution would be NYC. However, I did not hear one person even mention the coronavirus and didn't spot a single face mask the entire night. I did hear several conversations along the lines of 'I hate Trump, but Sanders?' in this very liberal city, but that is a topic for another article.

As my Forum members and Real Money Pro followers know, I have been preaching caution on equities for many quarters now. And no, I hadn't an inkling of something like COVID-19 coming out of left field to smack the markets like what happened last week.

The fact is that equities had gotten ahead of themselves. The S&P 500 advanced nearly 30% in 2019, despite no earnings growth on a year-over-year basis. That simply is not sustainable. I have been advocating for raising cash allocations within portfolios and using risk mitigation strategies like Buy-write orders which are known as covered calls for many months now. We even added an 'option play of the week' feature to both The Biotech Forum and The Busted IPO Forum in the second half of last year to highlight these opportunities.

I could see the S&P 500 entering 'bear market' territory if we continue to get reports of COVID-19 cases in new countries in the days and weeks ahead, but I believe we are more than halfway through any sell-off. The Federal Reserve is already making noises about intervening with rate cuts, if necessary. In addition, the yield on the S&P 500 (1.9%) far exceeds that of the 10 Year Treasury (1.16%) in what is a historically rare occurrence. A small rally late Friday in equities was also encouraging.

As can be seen above (as of February 29), the United States has seen few coronavirus cases so far. The red above marks states that have at least one coronavirus case confirmed, while blue marks states where at least one individual is suspected of having COVID-19.

As of Sunday morning, only one person in the whole country has been confirmed dead of the disease, and he was already in poor health. For those wanting some additional reassurance and perspective on this outbreak, there was a good article on RealClearScience this morning about five good reasons we should not panic about this most recent outbreak of a virus that could eventually get the 'pandemic' label.

My game plan remains the same as it has been for some time. I will continue to buy additional declines incrementally using buy-write orders both in ETFs and attractive individual equities.

One ETF I plan to add to via covered calls if this pullback continues early next week is the Energy Select Sector ETF (XLE) whose two largest holdings by far are Exxon Mobil (XOM) and Chevron (CVX). This ETF is already down a bit over 30% in 2020. In addition, the ETF yields an almost unheard of five percent. Adding an option premium component to that via covered calls seems to be a prudent strategy that should pay off in the months ahead as eventually COVID-19 is contained and fades from the headlines.

In the meantime, I look forward to the beginning of March after what was the ghastly end of February as far as investors are concerned.

On War - At the end, the only real statement either side can use is 'It seemed like a good idea at the time." - Marsha Hinds

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I am/we are long XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Maga infinity]

I have to iterate multiple times that this market drop has nothing to do with virus. Market is a by product of the Fed monetary policies. Right now, Fed says up and it will be up.

[Goalkick9]

@MAGA2020 - I'm pretty sure you're the only one who thinks the market is unaffected by the virus, one way or the other.

While the market may not be human, it is operated by humans and is affected by human emotions.

Four more US deaths reported today, all in Kirkland, WA. That has an impact.

[Maga infinity]

@Goalkick9 are you saying 4 more deaths made the Dow up 1200 points? Then we should have another 4 more deaths.

[nerd_rage]

Ouch! Quite the vicious capitalist, Sir.

Ha ha it's just a virus of the brains. People are going nuts in uncertainty like this. The market will probably be down 2000 tomorrow and then more bargain hunters flood in and it bounces back up...

[Maga infinity]

Author - your title is misleading. Stock is no human, and the virus can not affect stocks. As long as Powell can make an order, then the stock is fine. Actually the stock is totally immune to the virus.

[nerd_rage]

The market is prone to the madness of human brains and those brains are definitely infected by Covid. Maybe not in an epidemiological sense.

[lorinstoll]

I don't know if anyone is old enough to remember the Middle East respiratory syndrome (MERS) about 8 years ago, but the fatality rate was about 40%.

This COVID-19 isn't much worse than the flu, maybe even less deadly.

The media have turned this into another "sky is falling" even just like they did when Net Neutrality was repealed.... btw - I haven't been able to get on the internet even since Net Neutrality was repealed, I am wrote this on a typewriter and sent it snail mail to Seeking Alpha /s

[Goalkick9]

@lorinstoll - MERS isn't really a good comparison. There were only 2500 cases total. SARS only produced 8000. Those were prime examples of media-generated panic. This isn't.

[lorinstoll]

The sky IS NOT falling Goalkick9

Sorry, but the Apocalypse has been cancelled.

[Maga infinity]

@lorinstoll 40% or 100% makes no difference to the stock market. Your government is determined to pump the market; then what else matters? Unless the virus kills all Fed officials which is not likely.

[David/David]

It would be nice to accept the re-assurances at face value, but I have bad memories of Hank Paulson (with Ben Bernanke at his side) sometime during the summer of 2008 saying that "there is no contagion." So permit me to bring some skepticism to this discussion.

The data from China (I may not trust the incidence figures, but the risk factor data are probably ok--no reason why the government there would think those were worth the effort to manipulate) suggest substantially higher mortality (up to 10%) among those with heart disease and somewhat lower (but still quite elevated) mortality among those with respiratory disease.

The virus has been circulating in Washington States for 6+ weeks, and there hasn't been a notable increase in mortailty there. On the other hand, no one knows how many of the infections have taken place in the at risk groups in adults versus those in children. Testing has been restricted by CDC until recently.

Two things worth remembering: 1. In 1918, there were two waves of infections. The all-clear was sounded during the summer, and it turned out to be premature. 2. The issue may not be a matter of the number of infections so much as where they are coming from. If adults start getting infected and mortality rises (because of the at risk group discussed above) and there is much suggestion that those infections are coming through in-school transmission, the US will have to follow Japan in closing the schools. Otherwise, it's just another outbreak. More severe perhaps and with some short term pain. How likely is that? Right now, that's a crapshoot.

There will be near term economic consequences, and for those of us old enough to remember 1992, that may turn the election to an extent that current pundits aren't talking about (which opens a scenario in which Sanders wins)--and if you don't think so, go interview James Carville.

The one certainty is that the Chinese infection totals are likely low, and that the incubation period for the virus seems to be longer than 2 weeks. If that's the case, then there may well be quite a resurgence in China, with a rethinking of containment methods in the US.

[Goalkick9]

@David/David - The overall Chinese infection totals are certainly low, partly because detection methods are still uncertain (many facilities are still using chest X-rays for diagnosis) and partly because many cases are so mild as to be undetectable. However, the establishment of those coronavirus "field hospitals" across Wuhan, to which only the sickest patients are taken, have given the government a much better handle on compiling statistics.

I do tend to believe the numbers about the number of new infections falling, if only because of the draconian measures taken by the Chinese government to reduce the spread. Residents of Hubei province, who have been locked down at home for weeks -- you literally can't walk out the door without having the police on your ass -- have been told to expect their home quarantines to remain in effect until at least March 30. Chinese authorities were slow to react initially, but they are dead serious about stopping it now.

[Goomba69]

@Goalkick9 and those serious efforts to stop the spread do not seem feasible to implement in the US. It will be incredibly surprising if NYC, LA, Bay Area get locked down with no travel in/out/within.

[Goalkick9]

@Goomba69 - Absolutely correct. It would be more than surprising -- it would be logistically and legally impossible to implement those measures here. Nor would it be possible to segregate thousands of patients to specific medical facilities. Even if the Chinese policies prove successful, they are irrelevant to the US.

[Goomba69]

A nice indicator of how widely this pandemic will sweep through the US is the description of how New Yorkers are showing no signs of caution. Ergo how investor expectations are not pricing in enough risk. Global GDP, US GDP, and most corporate EPS will be hit hard this year.

For long term buy and hold positions no problem over the next 5 years, but painful paper losses for this year.

[Bret Jensen]

For a good clue on how the media is panicking some of the population, look at the mob at Brooklyn Costco this weekend. www.reddit.com/... that was an isolated case of mob panic, haven't seen much concern in Manhattan yet.

[Goomba69]

Bret a comment I think you will like, followed by the source that some may see as part of the media panic machine.

Heywood says that after his stint with the CDC, “the thing that I came away [with] is a question about the balance of efficiency, of capitalism, which drives storage capacity to as close to zero as possible, and it makes the networks that deliver them as thin as possible.” He adds, “That works well in a stable environment. But what about during a disruption? Imagine Amazon going into Christmas without preparation. That’s a pandemic.”

[Goomba69]

www.technologyreview.com/...

[Chomskeet]

Many are discounting the potential severity of this particular outbreak by making a false equivalency between this and previous outbreaks

About 1/750 die from the flu, 0.13%, vs 2% for COVID-19. It should be noted that flu death rate is from the CDC whereas the 2% rate is mostly calculated out of China where the healthcare system is obviously lacking. The problem for the economy is that asymptomatic carriers appear likely to have the capacity to spread disease, it cannot be stressed how big a problem this is. If this proves true, which appears likely, this will result in a lot less people engaging in certain activities. Certain segments of the market are likely to be impacted a lot; poor Disney, airlines, Carnival, etc. However, in order to contain this we're going to see supply chain disruptions and people not going out much which will affect the entire economy. The medical journals are comparing attributes of this outbreak to the 1918 flu, not good. It's not like the world is ending but this has the capacity to have a decent likelihood of being a big deal, unlike many other outbreaks. I think we've been jaded by the hype from previous outbreaks which fizzled out to be just a blip on the radar. While it's not certain this is going to be a big thing, there are certain unique attributes (outlined in the references below) that give it the capacity to be a problem. I'm very cautious about my approach to the market right now. I'm an MD by the way. If we are lucky all of the people freaking out and being cautious will stem the tide long enough for it to get warmer and reduce transmission rates.

The administration's response to this has been pathetic and they clearly have no idea what they're doing other than giving false reassurance, they don't understand or care about science and they got rid of the pandemic experts, yes that's actually true. Healthcare and this event by extension have the ability to cost Trump the election, another likely drag on the market, especially if Bernie gets the nomination and has a better chance to win because of all this www.snopes.com/...

www.nejm.org/...
The 1918 influenza pandemic was the deadliest event in human history (50 million or more deaths, equivalent in proportion to 200 million in today’s global population).
Preventing and controlling future pandemic occurrences remains a global priority.4 With Covid-19, are we seeing a replay of 1918? Although we did not “witness” the beginning of the 1918 pandemic, evidence suggests that wherever it began, it silently spread around the world, causing mostly mild cases but also mortality of 0.5 to 1% or higher — a rate that was initially too low to be detected against a high background rate of death from unrelated respiratory illnesses. Then it suddenly exploded in urban centers almost everywhere at once, making a dramatic entrance after a long, stealthy approach. We are now recognizing early stages of Covid-19 emergence in the form of growing and geographically expanding case totals, and there are alarming similarities between the two respiratory disease emergences. Like pandemic influenza in 1918, Covid-19 is associated with respiratory spread, an undetermined percentage of infected people with presymptomatic or asymptomatic cases transmitting infection to others, and a high fatality rate.

www.theatlantic.com/...

www.nejm.org/...
The viral load that was detected in the asymptomatic patient was similar to that in the symptomatic patients, which suggests the transmission potential of asymptomatic or minimally symptomatic patients. These findings are in concordance with reports that transmission may occur early in the course of infection5 and suggest that case detection and isolation may require strategies different from those required for the control of SARS-CoV. […] Identification of patients with few or no symptoms and with modest levels of detectable viral RNA in the oropharynx for at least 5 days suggests that we need better data to determine transmission dynamics and inform our screening practices.

www.nejm.org/...
The epidemic of 2019 novel coronavirus (now called SARS-CoV-2, causing the disease Covid-19) has expanded from Wuhan throughout China and is being exported to a growing number of countries, some of which have seen onward transmission.
Thus, several questions are especially critical. First, what is the full spectrum of disease severity (which can range from asymptomatic, to symptomatic-but-mild, to severe, to requiring hospitalization, to fatal)?
Second, how transmissible is the virus?
Third, who are the infectors — how do the infected person’s age, the severity of illness, and other characteristics of a case affect the risk of transmitting the infection to others? Of vital interest is the role that asymptomatic or presymptomatic infected persons play in transmission. When and for how long is the virus present in respiratory secretions?
And fourth, what are the risk factors for severe illness or death? And how can we identify groups most likely to have poor outcomes so that we can focus prevention and treatment efforts?
Testing in unexplained clusters or severe cases of acute respiratory infections, regardless of a patient’s travel history, may be a sensitive way to screen for chains of transmission that may have been missed. Such findings are relevant particularly in light of evidence that even Singapore, with one of the world’s best public health systems, has found cases that have so far not been linked to known cases or to Chinese travel. If such undetected introductions are happening in Singapore, it is prudent to expect they are happening elsewhere as well.

www.nejm.org/...
We discovered that shedding of potentially infectious virus may occur in persons who have no fever and no signs or only minor signs of infection.

[Bret Jensen]

Let's see, the POTUS severely restricted travel to/from China on Jan 31st for which Biden, Schumer, Pelosi and the rest of the DNC/media called him xenophobic, and of course, 'racist' for doing so I guess we should grateful we did not have a democrat in the WH for the outbreak, as we would be seeing many more Covid-19 cases already. JMTC

[Goalkick9]

Just had to take it political, dincha? And still can't resist making stuff up that never happened.

The "racist" outcry was about the travel ban against Nigeria, not the China restrictions. Not one of Biden/Schumer/Pelosi/DNC/media called him xenophobic or racist for the China travel policy. Never.

Nice try, though.

[Pharma95410]

If we are going to have a current conversation about Coronavirus then let’s use the current facts NOT the ones repeatedly espoused by the media. This isn’t directed at you but if we are going to have meaningful discourse let’s use the most up-to-date thinking. As of 3/2 writing this comment the global death rate is 3.4%. This is up almost double from the 1.8% rate in January.

[Bret Jensen]

Don't say this often, but Gov. Cuomo just did a solid and reassuring press conference in NYC on city's Covid-19 preparations....AKA, we have seen this rodeo before (Swine Flu 2009 when a 100 schools closed, Ebola scare, SARS in 2003, MERS.....etc...)

[Goalkick9]

Swine flu, which had a very low mortality rate, infected 61 million Americans. If even the reduced estimates of COVID-19's mortality rate are anywhere close to accurate, a similar infection rate would produce more than a million deaths in the US, many of them elderly. Not exactly a rodeo.

[Bret Jensen]

The 2018 flu season killed some 80,000 Americans and barely got a mention in the media. I am taking the under on Covid-19 to that.

[Goalkick9]

If the Gilead treatment drug now under study proves effective, that may be a good bet. I'm told the Wuhan study looks very good.

[Me XMan]

Last Friday I closed my eyes and loaded up on $XOM $48's and $OXY $30's.

[ziggyzig]

Too soon

[Haddington2]

If we can keep Iran from attacking Israel, they will have a vaccine in a couple of months.

www.jpost.com/...

[Maga infinity]

I don't understand. Do you mean the robots will be affected by virus? Fed printing will be affected by virus? The full credit of US government will be affected by virus? The greatest nation in history will be affected by virus? The so much winning will be affected by virus? The 6 times bankruptcies president will be affected by virus? oh, Come on! Give me a break.

[Goalkick9]

"...the big sell-off is being fueled largely by the 24/7 news cycle and social media."

Quite the sweeping conclusion. Based on actual analysis or your own off-the-cuff opinion?

[Davos Thomas]

Only 500 people tested in US ad of Saturday. Testing is now opened to all diagnostic labs, public and private. We'll have more data in the coming days.

[njbr]

Well, the difference between all things CV Friday and Monday is significant.

[Maga infinity]

@njbr I don't really care about the virus. With a death rate 2%, the maximum death toll is 6 M. This is nothing.

[njbr]

Donald, is that you??

What a fine comment that is...

Well, a death rate of 2% occurs with good health care. Up to 15% of those infected need hospitalization, up to 5% require intensive care for weeks. That is quarantined intensive care.

I hate to tell you this, we don't have the beds or facilities for this level of health-care requirement.

If hospitals are overwhelmed, as in China, and has has been reported in Iran and Italy already, then death rates will climb higher. And we have fewer beds per capita than Italy.

And, I bet you didn't know that some recovered people can still spread the illness?

But hey, pretend that a population worried about the potential for serious or fatal illness from every-day contact with the world means nothing to the economy.

[Maga infinity]

Virus will make America Greater Again.

[Bret Jensen]

The media is always happy to put the 'sheeple' into panic mode for their own purposes...www.realclearpolitics.com/...

[Maga infinity]

@Bret Jensen absolutely! Fed, please take over all panic sells

[Briber]

Keep watch. It is a geometric expansion of infection. I will be surprised if the US does not have 500K infections by mid April. But no need to worry, Rush says it is like a cold...….

[chkm8k2]

Rush??? I'm really confident he's up on the latest science.....lol