*the lower case in the title is intentional – you don’t deserve caps virus!
Although this blog is called “Food, Finance, Travel”, I never write about finance. However, the current situation with the corona virus is having an impact on all three – food/restaurants, travel, and obviously the economy.
In the long run, the stock market should reflect the performance of an economy. The market has to evaluate the impact of this virus on the profits of companies. The longer the shutdown, the more damage. The volatility is being caused by uncertainty as to the length of the economic shutdown.
I think that the first thing the market needs to see is that the virus is “under control”, and then it can focus on quantifying the impact to the economy. One way to do this is to look at the daily growth rate of new cases. Note that this will be an imprecise measure due to differences in testing and reporting by country, but its a good guide.
The first confirmed case(s) of COVID-19, according to the data I obtained from the European CDC, was in China on December 31, 2019. Since then it has spread to affect other countries.
In my research, I looked at how much the markets are reacting to the daily changes in the number of confirmed cases from February 21 to March 31, 2020 (excludes weekends; assumes that any growth in cases over a weekend gets reflected on Monday). I choose this time period because at the start of the pandemic, daily changes were large due to a lower starting base (going from 1 to 2 cases is a 100% increase). The table below show the daily change in confirmed cases versus the daily change in the S&P 500.
The table below presents the actual correlations in the daily changes from the date indicated to March 31, 2020.
As the table above shows, the correlations are getting stronger. At the outset, there was virtually no correlation in the daily changes in confirmed cases globally and the S&P 500.
Trends in Daily Growth Rates (select countries)
The above is likely obvious to anyone following the markets so it is important to look at the trends in the daily changes to give us an indication of when the virus might stop having a negative effect on the markets. The chart below presents the daily changes for select countries, since the first confirmed cases.
For approximately the first 60 days, all the confirmed cases were virtually in China so that is why in that time period, the lines for China and the World appear to be the same. The data shows that China’s growth rate for confirmed cases peaked at about day 19 since the first case was reported, was volatile until day 29, and then steadily declined from there.
The first confirmed case in Canada was reported on January 26, 2020. Since then, daily changes have been quite volatile, but it appears as if the most recent data show that the daily changes are declining. The 20 day average daily change is 25.3% versus 16.3% for the past 5 days.
In the USA, the first confirmed case was January 21, 2020. The USA is definitely seeing a declining trend in the daily growth rate. The 20 day average was 28.6% versus the 5 day average of 17.2%
With the flood of information regarding the pandemic, the key number that investors should watch for is the daily growth rate in confirmed cases. Although I am not a medical expert, and do not attempt to forecast when the pandemic will end, the data above does look encouraging in terms of improvements in the velocity of new cases. Continued improvement in such numbers should result in less overall stock market declines as a result of corona virus cases reported. The shorter the world is on lockdown, the lower the economic costs.
Once the virus is under control, then investors will have to deal with the flood of financial, and economic data, to assess the actual damage to the economy, and revisions to the outlook for such data. At this point, the markets will adjust again based on whether current expectations have been worse or better than the actual outcome. In my view, the impact will likely be for a few quarters with a gradual return to normalcy based on early economic data coming out of China.
I will also update the daily growth rates on this blog. Here is the data for April 3, 2020.
Good and bad news today. In the USA, the rate of growth continues to slow. Below shows the average 20, 10, and 5 day rates of growth, as well as today and # of days since the first case was reported.
The U.S. growth rate was 13.3% today versus 5 day avg of 14.5%.
Globally, we witnessed a similar trend:
7.72% growth in cases today versus the 5 day average of 8.82%.
In Canada however, we witnesses a large spike:
Today’s growth is above the 5 day average.
A few things: this doesn’t adjust for the level of testing in a country. Only what is reported by the CDC. Also, Canada is 6 days “behind” the USA in terms of when they reported their first case. At day 68, the USA’s change that day was 21.7% and steadily declined from there. Another update tomorrow. Stay safe.