Historical comparisons of pandemics and the economy.
Written by Daniel R. Catone | March 16, 2020
In a recent research I have found some historical examples of markets like our current one to better understand where we are and where we may go. The following information is extremely detailed and summarizes many hours of research. I hope this information cuts through the misinformation being spread.
In 1957, a flu called H2N2 swept from China across the globe. The CDC explains: “In February 1957, a new influenza A (H2N2) virus emerged in East Asia, triggering a pandemic (“Asian Flu”). It was first reported in Singapore in February 1957, Hong Kong in April 1957, and in coastal cities in the United States in summer 1957. The estimated number of deaths was 1.1 million worldwide and 116,000 in the United States.” In 1957, the population of the United States was 172,000,000. This flu infected approximately 25% of the US population, or about 43,000,000 people. This equates to a mortality rate of around 0.30%, roughly 300% more deadly than the normal seasonal flu. No efforts were made to quarantine individuals or groups, and a deliberate decision was made not to cancel or postpone large meetings such as conferences, church gatherings, or athletic events for the purpose of reducing transmission. No attempt was made to limit travel or to otherwise screen travelers. Emphasis was placed on providing medical care to those who were afflicted and on sustaining the continued functioning of community and health services. The disease was highly contagious with an R0 factor of 1.65 (every infected person infected 1.65 people). This flu was about 30% more infectious than the seasonal flu. This disease was skewed to younger people: “The highest attack rates were in school-age children through young adults up to 35 or 40 years of age.”
This infection in 1957-58 resembles what we are facing today, with differences I’ll highlight below. More relevant to the work I do for you, I’d like to share my research on what this flu did to the US economy. Right now, I am trying to figure out what sort of contraction we will see in the next quarter for the US economy. The market is assuming a sharp recession and has largely priced in such an event and I think the market is correct. The question is how sharp of a recession we will endure. If 1957 is our guide, we may see a similar economic response. In the third quarter of 1957, US GDP was tracking at a 4% rate. By the 4th quarter, GDP slowed to -4.1% (an 8.1% swing!) and then to -10% in the 1st quarter of 1968 (a massive 14% swing!). This was as 116,000 Americans had died and upwards of 60% of school children had missed school. The SP500 had peaked in July 1956 at 466 and declined to 364 by December 1957, a loss of about 22%. One year after this low point, the SP500 had climbed back to 494, or a gain of 36%.
Fast forward to today. This virus, nCOVID-19, is rapidly spreading around the globe. It is unclear how deadly the disease is as different nations are facing different outcomes. For example, Italy has 29,580 people confirmed infected, 2,749 recovered, and 2,158 deceased. This is approximately a 10% mortality rate. On the other end of the spectrum, South Korea has 8,236 infected, 1,137 recovered, and 75 deceased. This is only a 0.1% mortality rate, comparable to the seasonal flu. After speaking to an epidemiologist, it seems as if testing is making the difference in the math. In SK, 20,000 people a day are being tested so their infected rate is more accurate. This is not the case in Italy. It could be that many times the infected rate in Italy is the TRUE infected rate and if they did test everyone they would see a much lower mortality rate (known dead divided by actual infected). Therefore, those receiving tests are often the very sick or those in the ICU, skewing the negative outcome rate. Further, there is evidence that this disease is disproportionately impacting older people and people with pre-existing conditions. This is a sharp difference with the 1957-58 flu. Currently, the US has 4,287 known infected, 17 recovered, and 75 people deceased. This is a mortality rate of 0.017%, much closer to South Korea. However, as is being widely reported, we are not testing everyone, so this mortality rate may be showing a far higher current mortality than is actually occurring (let’s pray this is the case). On the other side of the coin though, the diseases is newly in the US and many of the 4,287 cases haven’t had time to make either a recovery or a negative outcome (death).
There are more differences. The US, with the rest of the world, in contrast to 1957-58, is taking dramatic action to slow the spread. I don’t need to remind you of all the closures, quarantines, and social distancing, but needless to stay, this is a MUCH better response than the no-response of ’57-’58. There is further reason for optimism as China is seeing a slow-down in infection, and South Korea is seeing a decrease now, and Japan has reopened their schools. We are 3-4 weeks behind these three nations and 2 weeks behind Europe (where the disease seems to be peaking).
The markets have fallen 29.5% from their high of 3,386 on the SP500 to 2,386 today. But, from January 2019, the SP500 is now down from 2,531 to 2,286, a decline of 6%. Not great, but perhaps not as bad as one might have suspected. In some ways, the speed and circumstances of this decline is unprecedented, though 1957-58 show similarity. The market is searching for a bottom and it will be found eventually if it wasn’t found today. However, we can be thankful that the US economy going into this recession was very strong. This will set us up to some degree for a bounce. As of right now, it is not as if people aren’t spending money because they don’t have any, they aren’t spending money because they can’t. This is called pent-up demand and if federal and state action is swift enough, we can bridge to recovery and get back to normalcy. The actions of the congress, senate, executive branch, and Federal Reserve bank, have been aggressive and far better than their slow/tepid response to the financial crisis in 2008.
Based upon this research, I believe the US will experience a very sharp recession. A -10% is highly likely. It could even be as dramatic as 1958 and this would mean a -12% quarter, or a 14% swing from quarter 4, 2019. This does not mean markets will continue to fall. In fact, the recovery in stocks in 1957 began BEFORE the ’57-’58 recession ended. That said, volatility is here and it isn’t going away.