The reported effects of COVID-19, its official name, has caused us to want to know more facts-of-the-matter about the Coronavirus, rather than relying on the TV for commentary on how this is affecting the economy. In choosing the name, the World Health Organization simply used the Co and Vi from coronavirus, with D meaning disease and 19 standing for 2019, the year the first cases were seen.
The following economic data-points were gathered from various sources this week. We don’t want to bombard you with information, but we know you are concerned and, with all that is going on, we thought a historical perspective might help:
No one knows with any real certainty how much, or for how long, the Coronavirus will impact the US economy. What we do know is that it will have an impact. And, after data releases of recent weeks, we also know that the US economy was in very good shape before it hit.
The early economic headwinds from the Coronavirus are coming from slower production in China, which likely led to a big drop in inventories. We expect this to pull first quarter real GDP down to a 2.0% growth rate and we are now thinking growth will be zero in the second quarter. After that, given previous episodes of rapidly spreading viruses, inventory replenishment should boost growth to the 3.5 – 4.0% annual rate range in the second half of the year.
This may seem optimistic, but keep in mind what happened when the "Hong Kong flu" hit the US from September 1968 through March 1969, killing around 34,000 people in the US according to the Centers for Disease Control. During the last quarter of 1968 and first quarter of 1969, real GDP grew at an average annual rate of 4.0%. The "Swine Flu" in 2009 also did not lead to a recession.
However, a much more negative story unfolded in late 1957 and early 1958 when the US was hit by the "Asian flu," which killed almost 70,000 in the US and didn't spare younger people as much as the Coronavirus. Real GDP was growing around 3% annually in 1957, but as the flu started to peak in Q4, the economy shrank at a 4.1% annual rate, followed by an annualized 10.0% plunge in the first quarter of 1958, the deepest drop for any quarter in the post-World War II era (from 1947 through 2019).
But then, right after the plunge, the economy rebounded at a 7.8% annual rate for the next five quarters.
The bottom line is that we've had severe flus before and when we did have a downturn, the economy bounced back very quickly. The stock market is trending toward a steep drop in profits, but a strong recovery, which we expect, will reverse this as it has in the past.
BTW, you’ve most likely heard that Italy, hard hit with the C-19, has pretty much shut down their country. They have had a high percentage of cases there, but what you should understand is that Italy has the 2nd oldest population in the world, with Japan being 1st. In Italy, the average age of those who have succumbed to the virus is 80, which seems to be how the virus is trending globally.
In the United States, deaths from Influenza far outweighs C-19 deaths; Influenza has already taken the lives of 10,000 Americans this season, according to the U.S. Centers for Disease Control. Depending on which medical news source statistic you research, C-19 is responsible for between 22 - 38 deaths nationwide vs 10,000 Influenza deaths…so please keep the ‘news’ in perspective.
Now, with the NBA suspension of games, President Trump’s suspension of European flights, and crowd-control across the country, a lot more people are going to feel the pinch economically. Think about the food vendors at sports events…that’s a lot of hot-dogs and beer not being purchased. The light at the end of the tunnel is that the flu-season does not last long, and this will pass, becoming a memory just like the Swine Flu has, but in the meantime the safe vs. sorry choices being made are having an impact on all of us.
As mentioned in our last outreach, we are committed to the portfolio allocations we have in place; now is certainly not the time to sell anything, and all those investors out there who have been doing so have taken “realized” losses, as opposed to our clients, whose losses are “unrealized”…or just paper-losses; they are not real unless you sell something that has lost value…so we are being prudent and waiting it out.
Our primary job is to grow and protect your assets, but we also feel obligated to keep you informed about what is behind much of the market’s movement.
Donald J. DePalma Partner & CCO
Buckeye Wealth Management LLC or