Why stock prices are increasing
In recent days, a number of medical experts have predicted that the coronavirus will turn into a global pandemic. At the same time, the US stock market has rallied strongly. Why?
I’m not certain. Perhaps there are multiple factors, including an increasing likelihood of Trump’s re-election. But I suspect that one reason is that the stock market disagrees with the experts. The stocks and shares ISA market is predicting the coronavirus will not become a global pandemic. But what sort of data would lead to this expectation?
A recent Bloomberg article suggests one possibility:
While cases have spread around the globe, the virus’ impact has been most keenly felt in Hubei, which has seen a staggering 97% of all deaths from the illness, and 67% of all patients. . . .
But Hubei — known for its car factories and bustling capital Wuhan — is paying the price, with the mortality rate for coronavirus patients there 3.1%, versus 0.16% for the rest of China.
What could explain this huge discrepancy? The Chinese data is somewhat unreliable, as some deaths from coronavirus are listed as other causes, such as “heart failure”. But that’s true in both areas. Another possible explanation is that the virus has been in Hubei for a longer period, and that some of the outside cases will eventually lead to death.
But that explanation doesn’t seem consistent with the facts. From January 24 to January 28, about 6% of the total deaths in China were outside Hubei. Since then, the share has dropped steadily, and is now down to 2.2%. The share should be increasing.
I have two other explanations:
1. The number of cases of infection outside of Hubei is much more accurate than the number within Hubei. Within Hubei, the facilities are overwhelmed and there may be far more infections than reported, as many patients have not been tested. That also implies that the actual death rate is somewhat lower than 3%.
2. The people who fled Hubei are likely middle-aged, not elderly. Most of the deaths are among the elderly. Note that the death rate overseas is also lower than in Hubei, but not as low as the non-Hubei part of China.
I suspect that the stock market disagrees with experts who predict a global pandemic:
The Wuhan coronavirus spreading from China is now likely to become a pandemic that circles the globe, according to many of the world’s leading infectious disease experts.
It will be interesting to see who turns out to be right. I don’t have a strong opinion either way.
One thing is clear; the Chinese government badly mishandled this crisis and Xi Jinping’s authoritarian policies have created a horrific situation within Wuhan. If local medical officials had not been silenced early on, the crisis could have been nipped in the bud. On the internet, lots of Chinese citizens are now recommending the documentary film “Chernobyl”.
Off topic: We now know how many Republicans have integrity.
Precisely one.
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5. February 2020 at 15:04
There are two variables at play. 1. How will the virus spread. 2) Will governments over-react with GDP damaging regulations (beyond what is optimal to deal with the externality of transmission.) #2 does not look hopeful.
5. February 2020 at 15:29
Scott,
Integrity to you is replacing high IQ Americans with people who blow up their own countries, and destroying American conservatives political power. Make America California! I can’t wait for your 30% COL adjusted poverty rate future!
5. February 2020 at 16:14
I hate to be cynical about people within the medical industry, or healthcare field, but the predictions of global pandemics might stem from agency imperatives. The health care agencies are prone to predict terrible pandemics, just as the national security guys scaremonger incessantly.
Wall Street dismisses the idea of a global pandemic, just as they dismiss the idea that the Russians will invade the United States (as recently suggested by Rep. Adam Schiff).
I also think equities and property is highly valued due to chronic and global capital gluts.
I also puzzled about the high death rate in Hubei. Let us hope it is an anomaly and not a precursor.
5. February 2020 at 16:14
Pandemic or not is a simple matter of definition. The virus is so close to the definition that it most likely will be declared a “pandemic”.
But I agree with the markets that it won’t be as bad as initially thought by some, the markets are correcting their own setbacks. I haven’t looked at all the markets, but the S&P500 for example, is a bit below its old pre-crisis high.
I assume there will be setbacks again as well. The virus most likely will survive for many months, if it can be eradicated at all. The eradication of SARS (in humans) took 2-3 years, and there were fewer cases back then and SARS was not so contagious. So there is still great uncertainty in this area.
The virus seems to be great for the Chinese democracy movement and for areas like Hong Kong and Taiwan. The citizens have become more sceptical and are questioning certain actions of the regime. They suddenly dare to ask things like: Who knew what, when, and where? What was covered up? What isn’t working and why? How can the regime be held accountable?
Imagine a massive killer virus raging through China, disfiguring everything. The Chinese would turn Xi into Louis XVI faster than Xi could say “coronavirus”.
5. February 2020 at 18:46
Scott,
there’s other factors too that could lead to the higher death toll in Hubei than elsewhere. As the virus spreads, it undergoes generations of transmission, each time with probabilities of small mutations of which some variants have a selective advantage. The evolutionary dynamics favor the selection of variants that are more transmissible, but less severe and less lethal. In principle, the virus could become both more infectious and more lethal at the same time, but lethality hurts its evolutionary chances, and besides, biochemical modifications usually have trade-offs. So, higher infectivity would likely have a trade-off in being less effective at other things.
In the long run, diseases that are well-adapted to humans are benign parasites: the best evolutionary outcome for any virus is to infect everyone and kill no-one. Like that other coronavirus, the common cold.
So here’s the possibility – the more transmission generations the virus has travelled from the epicenter, the more transmissible and the less lethal it becomes. Hence the higher death rate in Hubei or first-generation exports, and hopefully a similar tendency to become es and less dangerous at each transmission generation.
I still have the suspicion that SARS disappeared eventually not because of any human efforts, but because it may have mutated into subclinical variants the ended up infecting everyone, effectively “vaccinating” them against the actually lethal variant. (and my biggest gripe back then with SARS was precisely that no one seemed to ask the question – why exactly did SARS disappear? that would have been an invaluable information as to how it spread in the first place).
5. February 2020 at 18:46
Could the stock market be rising just because the passage of time has revealed that the very worst imaginable risks from the virus are not coming to pass? As in, it’s not as infectious or deadly as something out of a horror movie? The US stock market doesn’t really care if a few hundred thousand people in China or elsewhere die; as long as a sizeable share of the US and global population is unlikely to die such that global output and trade continues, it is business-as-usual.
Similarly, if at some point there is confirmation that Tesla won’t take over the world, then even though it could still becomes a globally-significant car manufacturer, its share price will tank?
5. February 2020 at 19:45
It seems like there is a third explanation for the difference in mortality risk: the quarantine itself is increasing the mortality of the virus in Hubei because people with transportation shut down aren’t able to access medical care and local resources are overwhelmed yet people are unable to seek resources further afield.
But I agree that the relative stability in the markets is a good sign that this disease will likely be under control soon and will not cause major long-term negative impacts. Even the Chinese stock markets are only down modestly and have been rebounding from their big post-Lunar New Year decline over the last few days. If the 0.16% mortality rate in the rest of China holds up, then this disease will turn out to only be slightly more serious than a normal flu season and all reactions by both China and other countries will seem extreme and counterproductive.
Christian, I could see the virus going either way. It could weaken the regime for the reasons you mention. But when Chinese people see how quickly foreign countries put up travel restrictions and how many of the supposedly anti-government protestors in Hong Kong want to do so too, it will remind them that most other countries will not treat them well, especially if they are seen as a poor disease-ridden country and this will strengthen their support for a powerful central regime for nationalistic reasons. It’s better to live under a moderately prosperous authoritarian regime that can at least stand up for you like in China today, than in a country that is poor and easily pushed around by other richer countries that you have no influence over like China 100 years ago.
5. February 2020 at 21:47
mbka, I agree in principle–that’s probably part of it, but it seems a bit too soon to explain such a dramatic difference in mortality with that factor.
I agree about SARS.
Rajat, Yes, but there’s a big difference between a few thousand Chinese dying a a few hundred thousand dying. In the later case, the disruption to global supply chains might be huge.
Mark, That also might be part of it. The difference is so big there are probably multiple explanations. See mbka’s comment as well.
6. February 2020 at 03:13
The WP is reporting this morning unconfirmed reports of a coronavirus treatment, which sent global markets soaring. But aside from that, the U.S. report this week of strong manufacturing output growth contributed to the U.S. market gains. People may forget that manufacturing output includes imported intermediate goods, which may reflect strong imports from China rather than output here. In any case, the effect of the coronavirus on output over the coming months should be large, as many industries in China essentially shut down. That, in turn, should significantly lower imported intermediate goods, which will depress manufacturing output in the U.S.
6. February 2020 at 07:15
Markets have snapped back to pre Coronavirus levels. It does appear that it’s danger quotient may not be much different than the normal flu. But, this has to impact China’s economy, one would think. Who knows?—not me. Also, ADP, who annually tracks GOVT numbers pretty closely, had job increases of 290K, twice expectation. Still, markets have had more volatility—-even if we pretend it’s just a reversal of fear—-which is generally not good.
I disagree with your comment on Romney. As absurd as Nancy’s actions were—-and it really was bad, I find Romney’s worse. He is strange—-and I think close to a political idiot. He was called everything Trump has been called. If he were elected he would have been Trump——except handsome trim and polite. He is why Trump was elected. Romney has no courage. If he did, he would be a Democrat. His half vote is preening. He let Candy Crowley off the hook because he did not want to be a “bad” guy on Benghazi. I am ashamed I voted for him. I am glad Obama won.
6. February 2020 at 09:05
I’ve always been a little uncomfortable with this argument, but I’ve been hearing coronovirus -> lower interest rates -> markets go higher.
I think a lot of people are viewing it as a net zero or net positive for equity.
6. February 2020 at 09:27
Another explanation could be:
Chinese attempts to keep it quiet and deny there was a problem led to a delay in treatment that ultimate caused far worse outcomes than would otherwise have occurred.
6. February 2020 at 09:40
I guess under-reporting of very mild and mild cases in Hubei province, including Wuhan city, is by-far the most likely reason for the difference in mortality rate. This is not the first time this sort of things happening. Exaggerated mortality rate were reported in previous epidemics because of under-reporting of mild cases at the beginning.
6. February 2020 at 10:40
3 minor points:
1. On that death toll chart, do we really need that decimal point? (I know it’s not your chart Scott, but this is really an instance of running amuck with unneeded precision.)
2. One of the doctors who sounded an early alarm (and was one of the 8 “rumor mongers” disciplined) has just died. The Chinese social media is buzzing with rage. It would be interesting to see how CCP media deals with this and how they get out of this delicate situation.
3. It has been fun watching senatorial verbal gymnastics on impeachment. Marco Rubio has been saying things that are quote worthy (not in a good way) and are particularly satire worthy.
6. February 2020 at 12:26
From what I read, it’s point one. They’re short on test kits. If you have too few test kits, it makes no sense to test everyone in Wuhan/Hubei. Those people are in quarantine anyway, so there’s no urgency of testing all people with mild symptoms in this region.
But of course you want to tests all suspects outside of Wuhan/Hubei as soon as possible, because they are rather few and because those tests are really important in order to prevent the spread of the virus.
@mbka
The evolutionary theory you described above, that viruses become more benign over time, does exist, for example with herpes viruses, but the experts are talking about long periods of time here, maybe thousands or even millions of years of co-evolution. The same is true for corona viruses.
As you said, the forms adapted to humans so far did only cause common colds. The current doctrine is that this takes a long time. The genes of a corona virus are comparatively resistant to change, for example in comparison to other RNA viruses like influenza. We don’t have that much time, the lack of human efforts could cost millions of people their lives before a really dangerous virus gets more benign.
So how can humans speed up this process? The key is human efforts, namely quarantine and isolation.
Leading SARS virologists are saying the following: When a virus opens up a new host species, it is as if a single breeding pair of birds colonizes a new island with its offspring, where the species does not yet exist. Initially, these new viruses are comparatively fragile because of their small population size.
We know that the fitness compared to the original population can then decrease, because random unfavorable genetic variants can also prevail. The new SARS viruses were just like the offspring of such a dispersed breeding pair. Where they settled, there were no other representatives of their species with which they had to compete. By accident, some of them lost their dangerous new characteristics. Those viruses continued to spread anyway – while the dangerous viruses died out in hospital isolation wards.
6. February 2020 at 17:18
Christian List,
It doesn’t take millions of years for significant evolution, viruses mutate much faster than that, chiefly because of their fast replication cycles. That’s why a new flu vaccine is needed every year. And presumably that’s how even the Spanish flu disappeared “naturally” after 18 months, with public sanitation measures not even remotely at current levels, no ways to test, or treat. This not to belittle any containment efforts, just to point out what happens to a flu pandemic if you do (comparatively) nothing: it still disappears after a year or so. Yes, killing many in the process – again, not my point here. My point is purely to illustrate the evolutionary dynamics if left alone.
Your last paragraph is just what I said in my comment, evolution towards benign forms is the expected, natural result. I agree that this would be much accelerated if the dangerous variants were isolated quickly and removed from circulation, so that the benign ones get a better chance to spread and dominate the gene pool, and crowd out the dangerous ones. Trouble is that the effectiveness of quarantines depends on various factors, namely, no infectivity before symptoms, and shortish incubation periods. See this article why we may not be so lucky this time, compared to SARS https://www.channelnewsasia.com/news/commentary/wuhan-coronavirus-quarantine-lockdown-containment-mitigation-how-12394178 . And looking at the numbers from China, the cases still rise fast in spite of unprecedented lockdowns of entire provinces.
That said, just like SARS disappeared naturally, hopes are that this one will too, for a combination of natural and human-enforced reasons. And that includes the fact that benign variants are naturally favored by evolutionary dynamics. My hunch is that, as usual, the natural population dynamics and macro factors are dominating the influence we have as humans (and governments).
6. February 2020 at 18:23
OT but in the ballpark.
Unit labor costs rising at 1.4% annual rat in Q4.
We are seeing improvement in productivity, and that is reducing unit labor costs. Unit labor costs had been rising in the 2+% range in 2019, which is hardly worrisome, but now appear to be receding again.
We can be optimistic on three fronts.
One is the figures “look bad” due to the Boeing debacle, which is depressing results in manufacturing.
The second cause for optimism is that “labor shortages” are encouraging investment in plant and equipment to boost productivity. When labor is cheap, no sense in capital outlays.
And a third cause for optimism is that aggregate demand is finally high enough to warrant domestic investment in plant and equipment, thus boosting productivity.
Let us hope global monetary authorities keep the virtuous cycle going.
6. February 2020 at 23:44
@ B Cole: Global monetary authorities are about to be tested, as the coronavirus shock is very real to global supply chains. This is an X factor type event that can easily tip us into recession.
It better be contained soon, and only 1Q20 earnings would then be hit.
7. February 2020 at 02:21
I was surprised to learn that Romney was the first senator in *history* to vote against his own party’s president in an impeachment trial. It still surprises me that impeachment is so partisan, given that the VP and President are from the same party. That seems to contradict partisanship itself which, after all, is the notion that one should support candidates based purely on party membership.
7. February 2020 at 03:42
Msgkings-
Right.
Right now, the monetary authorities have tossed the ball back into the Fiscal Court, claiming there is little more central bankers can do.
I suspect the real answer is to move away from the clunky, claptrappy Federal Reserve-commercial bank monetary policy system (the word “system” is a euphemism) and move to money financed fiscal programs to induce monetary stimulus (as advocated by Pimco, BlackRock, and Ray Dalio).
That will be a big change. Otherwise we can go to Federal Reserve quantitative easing in conjunction with federal deficits. I just hope we arrive at the deficits through tax cuts on wages and middle-income people, rather than more federal spending and corporate income tax cuts.
7. February 2020 at 06:40
Scott,
How in the world is Romney about integrity? He is so much easier explained by simple public choice theory. Romney is a buffoon (like Trump or even worse) who would do close to anything just to maximize his own benefit. Think about how he sucked up to Trump right after the election, hoping he could land a job in the government. And then, when Trump busted him, he suddenly discovered his integrity. What a crock of bull.
Let’s follow up on your integrity theory, just out of interest. So Romney detests Trump, all those who are cronies of Trump (unless it is him) are the devil. All right, let’s take his word for it, but practically the entire GOP is in collusion with Trump. So what is Romney doing in this terrible, terrible party when he has as much integrity as you claim? Scott, political analysis is just not your strong suit. And neither is morality.
@mbka
I wrote why corona is not influenza. L2R. And sure the Spanish flu “died out” — after 50-100 million were dead. This isn’t even mutation, that’s just, “hey let’s infect everyone, one part will be immune and the rest will simply die”. Virologists mean the mechanism you described in a different way, for example when they compare ebola to herpes. That’s evolution over a long period of time.
7. February 2020 at 13:40
@BC: Romney got permission from McConnell to make his vote that helps his brand, because they knew his vote wasn’t needed to acquit. Susan Collins got similar permissions. This is normal political gamesmanship.
7. February 2020 at 16:41
I have been told by reliable sources that the same people who designed the Federal Reserve System and manner of implementing monetary policy also designed the Iowa caucus system.
9. February 2020 at 04:29
Regarding Romney. I am with Dershowitz. Even if everything the Dems accused Trump of doing could be proven it would be too weak a case to impeach a president. If, after three years and millions of dollars, this weak case is the best the Dems can come up with, then why have so many people caught TDS? I don’t get it???
9. February 2020 at 20:19
Bob,
Maybe it rubs me extra wrong because I’m a government employee, but if I had done what Trump did, I’d have been marched out by HR within the hour. In fact, every other government employee in the US would have been promptly fired and likely charged for such behavior.
10. February 2020 at 08:51
@Bob: TDS is the current strain. Before TDS we had ODS, before that BDS, and before that CDS. Don’t act like your side wasn’t just as nuts over Obama.