The current outbreak of the Coronavirus has brought me back to a book I read last summer called Get Well Soon, History’s Worst Plagues and the Heroes who Fought Them. What was fascinating about the book was not necessarily the disease, but how humanity reacted to them. The world has lived through the nastiness of leprosy, polio, syphilis, and even typhoid. Many of these outbreaks could have been much smaller with more information, but alas, it was not available at the time. Some of the responses to these outbreaks caused behavior in people that is just plain lunacy in our modern world.
So, what is this virus going to bring us? Are the consequences worse than currently expected, better than that, or is the jury still out?
From a medical perspective, I really cannot render a judgement except to say that I have spoken with people in the medical community that I respect, and they believe that with proper medical care, this virus can be handled very much like a strain of influenza. But also, like influenza, without the proper care, or with the sick and elderly, it can be deadly.
As we look at the situation from an economic perspective, it is clear that our global supply chains are tightly linked. While the mechanisms of specialization and trade create massive wealth for those countries that take advantage of it, it also means as one goes, we all go.
As of this writing, Apple, will not make their production deadlines, causing revenue and earnings guidance to falter in Q1. None of this was due to anything happening to Apple, but its suppliers in China have been shut down due to the virus outbreak.
Medical outbreaks are scary because of the unknowns. Can it be transferred by touching, breathing, or just proximity? What are the mortality rates? Do antibiotics help? How about orange juice? There is very little chance of Coronavirus having a large-scale outbreak in the United States due to our overall higher level of education, combined with a robust medical delivery system. In China, the average GDP per capita is $7,755 – contrast that with the United State at $54,542. While it is not just money that makes a difference, it is also the places that we live. China is a very rural place, where many are still subsistence farmers. Running water is a luxury, and not many people use soap to wash their dishes.
Where do we go from here? It is clear we live in a connected world. This outbreak will have a material impact on both sales growth and earnings growth over the coming months. How much an impact will be determined on the effectiveness of the Chinese government’s containment plan and how the rest of world’s supply chain responds. At a minimum, at least one month of production can be written off. Do we have enough inventory in the supply chain to make up that difference? Quite likely, yes but for all of the most efficient companies. In this particular scenario, it will be the efficient ones that get the bulk of the misery.
It is our expectation that we will start to see a slow down in the rocket ride that is the stock market. Not because the economy is bad, or on the brink of recession, but more because the prices really need to better align themselves with the earnings over the past year and a half. The Coronavirus outbreak will also give an excuse to poorly performing companies to throw in all of the bad stuff to the next earnings report and blame it on something completely out of their control. We will come out of this on the upside, but that doesn’t mean it will be an “outsized” upside.
As always please let us know if you have any questions. Thank you for your continued support.
February 21, 2020