Outbreaks and the economy

Luckbox presents a series on “Trading China’s Coronavirus.” In this first part, we take a look at how outbreaks such as this can have a huge impact on the global and financial economy.

“Past performance may not be indicative of future results,” is a popular mantra (aka disclaimer) on Wall Street, and for good reason.

In the financial markets, there’s no guarantee that an attractive rate of return from a given investment strategy will perform the same way going forward, or that a set of events from history will unfold in the same fashion the second time around.

The current outbreak of a coronavirus, which was first identified at the end of 2019 in Wuhan, China, has a lot of people pondering this very question—whether the current epidemic will be quickly contained, like previous coronavirus outbreaks (SARS and MERS), or whether this one will produce a more devastating path of destruction. 

First and foremost, the well-being of humanity—and the planet as a whole—is without question the top priority. With nearly 2,118 people now infected by this new strain of coronavirus (the bulk of them in China), the prime concerns at this time are containing the spread of the virus and identifying effective methods of treating those who have contracted it. 

Because large outbreaks such as this can have a huge impact on the global economy, participants in the financial markets are of course also monitoring events closely to better understand how the spread of the coronavirus could affect the world economy, and many of the companies (public and otherwise) that operate within it.

Most investors and traders already utilize “news” in their existing strategies, so in that regard, following and reacting to the coronavirus outbreak wouldn’t fall outside normal operating procedure.

To provide more insight into the current outbreak, it’s helpful to look back at previous global health scares and understand how the financial markets performed in the aftermath of those incidents.

As one can see in the data below, the S&P 500 has, on average, performed quite well when looking at the 6-month and 12-month returns after the “conclusion” of a serious epidemic:

Because Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) come from the same coronavirus family as the current strain, one could argue that these two previous epidemics might be the closest proxies to this one. 

Like the latest outbreak, SARS was first identified in China and ultimately infected upward of 8,100 people (774 casualties) in 2002 and 2003. According to the World Health Organization (WHO), the disease has an average fatality rate of about 9.6%, with the great majority of deaths in 2002-2003 occurring in China. 

MERS, on the other hand, was identified in Saudi Arabia and is believed to have infected fewer than 2,000 people since it was first discovered in 2012. One difference between SARS and MERS is the higher fatality rate associated with the latter—closer to 35%. However, this may be at least partially due to a failure to treat milder symptoms early on, which may have resulted in a higher number of total fatalities.

As of late January, the current coronavirus outbreak has been linked to an about 2,118 infections, with current fatalities estimated at 56. That puts the fatality rate for this coronavirus strain at less than 3%, well below SARS and MERS.

While those statistics suggest that the current strain is less deadly than SARS or MERS, it’s clearly still too early to jump to any definitive conclusions. Market participants will therefore need to continue to monitor the current coronavirus outbreak carefully going forward to ensure they are managing risks in their portfolios appropriately.

And while the longer-term returns of the S&P 500 may not currently be under threat (based on the historical data in the table above), there has been a noticeable uptick in volatility across the global financial markets since the outbreak started making front-page news. 

Crude oil prices in particular have been hit pretty hard by expectations that global economic growth will suffer as a result of the epidemic. To learn more about the recent spike in oil volatility, traders may want to review a new installment of Closing the Gap: Futures Edition on the tastytrade financial network when scheduling allows. 

And the uptick in volatility hasn’t been limited to commodity futures.

Overall volatility in U.S. stock markets has risen as the number of infected has increased, with the VIX rising noticeably in recent days. 

Along those lines, the stocks (and associated options) of publicly traded companies whose fortunes are perceived to be closely tied to the current epidemic have also seen significant increases in volume and volatility.

As one can see in the list below, many of the companies attracting newfound interest are involved in either producing protective gear for the healthcare industry or developing potential treatments for coronavirus infections: 

• Alpha Pro Tech (APT): A manufacturer of masks and protective equipment for the healthcare industry
• Lakeland Industries (LAKE): A producer of protective equipment geared toward health emergencies
• Inovio Pharmaceuticals (INO): A vaccine developer focused on MERS treatments 
• Novavax (NVAX): A vaccine developer focused on MERS and SARS
• Allied Healthcare Products (AHPI): A manufacturer of respiratory equipment for the healthcare industry
• NanoViricides (NNVC): A producer of medical treatments focused on bird flu and swine flu
• Vaccinex (VCNX): A vaccine developer focused on a wide range of illnesses and diseases

The next issue of Luckbox magazine is focused on China. Help us with our coverage by lending your thoughts on the China Threat, Trade policy & Trump. Your responses may be published in our next issue. Check out the current Luckbox Reader Survey here.

Click here to read Part 2 of this series.

For more information on trading “news” in the markets, traders are encouraged to review a fresh installment of Futures Measures on the tastytrade network. For live updates, traders can also tune into tastytrade live from 7:00am-3:00pm CT every weekday.

Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.