The recent news of the SARS-like virus originating from China is rapidly becoming front-page news. Given Canadian demographics, it seems reasonable to expect a growing awareness of the problem.
By the time you read this, the virus will likely have killed a bit less than 3% of its subjects. Its victims are mostly elderly souls with pre-conditions of respiratory problems and ill health. It will spread. The rate of increase in cases will be rapid for possibly a month. The press will soon start talking about the rate of growth of infection. The death rate will be calculated. The financial press will start talking about global economic impacts. Stock markets around the world are already adjusting to this news and, as always, the reaction of some is to sell and see what happens next.
The following quote is taken from the Center for Disease Control (CDC) in the U.S.
“The burden of influenza disease in the United States can vary widely and is determined by a number of factors including the characteristics of circulating viruses, the timing of the season, how well the vaccine is working to protect against illness, and how many people got vaccinated. While the impact of flu varies, it places a substantial burden on the health of people in the United States each year. The CDC estimates that influenza has resulted in between 9 million and 45 million illnesses, between 140,000-810,000 hospitalizations and between 12,000-61,000 deaths annually since 2010.”
Last year the flu is thought to have killed 80,000 people in the U.S. The report continues: “In America, on average 37,000 people die each year from the flu.” On average about 447,000 go to the hospital each year. So, we can calculate the “death rate” at about 8% of those who go to the hospital. We assume that if you stayed at home you lived, so the rate of mortality is quite low for those infected. Still, most of this is during “Flu Season” so it’s a pretty concentrated event!
But here’s where it gets weird. It’s rarely front-page news. We certainly don’t report how many died each day, much less the number of newly infected. The flu ranks eighth for cause of death: which is a big deal! I don’t see any big charities trying to end the flu. The next leading causes of death are diabetes followed by Alzheimer’s disease; neither of which are front-page news either but have big money-raising organizations. The last time we had a flu like this recent ‘outbreak’ was in 2003 and it was SARS which killed 800 people. GLOBALLY. MERS in 2015 killed 875. I’m not belittling the loss of life, but 800 is less than the 37,000 average deaths per year. I’m not sure, but maybe, if it starts in China it’s more newsworthy?
We are not making light of people’s death, nor are we underestimating the potential for more bad news, economic impacts, and the further tragic loss of life. We are just saying that other than the alarming headlines and the loss of an unknown number of lives, the lasting long-term effects of this flu on the stock market will likely be muted and short term in nature.
The current virus that is capturing our global attention is a flu with similar characteristics to the ones that afflict so many of us every year. This is flu season. People will pass as they always do. Most of those who pass will already have respiratory complications. We should expect to soon hear that many people are being monitored. The number of reported cases will grow exponentially for a period. Most will not have the flu from China. The vast majority will recover. We should expect heightened awareness and concern. This will affect consumer behaviour. Travel companies like Booking Holdings will be impacted. Disney may see a drop in park attendance. People may go to the movies less. These are two of the companies that we own that will be impacted most in the short-term. Hence, out of an abundance of caution, we have sold our Booking Holdings. We have reduced our Disney. They remain excellent companies and we will look to reacquire them when we have better insight into the impact this event has on business activity.
When trying to judge risks that have low probability, but potentially devastating impacts, it is wise to take action incrementally as the facts evolve. It appears that the authorities globally are taking proactive measures and while the deaths are a human tragedy, the most likely economic impact is going to be short-term. China currently is the most exposed and its importance to the world economy is significant. Based on the way these outbreaks have matured in the past, the next month will be key to gauge how severe an economic impact it will have. Your portfolios have cash. We will be monitoring the situation closely as it develops over the weeks ahead. As always, we are available should you wish to chat.
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