COVID-19 is a Black Swan, What Does That Mean?

disease epidemic New coronavirus “2019-nCoV”, handwritten text.

Late last week markets began to take the novel corona virus very seriously, and returns started to walk back from the all time highs earlier in the month. That retreat accelerated this week as COVID-19 virus fears exploded and the potential of a wide ranging global pandemic seemed possible despite the enormous efforts of the Chinese to quarantine and contain the virus. In South Korea, Italy, Iran, Japan, Canada and the United States the virus has appeared in varying states of severity, and are sparking varying degrees of public health responses.

COVID-19 strikes me as a black swan event, an unpredictable outlier that can’t really be planned for. An “unknown unknown”. Governments have plans in place to deal with epidemics, and learn from past outbreaks, but can’t plan for a virus they don’t know about and proves to be better than the precautionary measures already established to contain such events. In the instance of COVID-19, the virus seems very virulent, spreading rapidly but also having a long incubation time. You may not show any signs of the virus, and, in a cruel twist, many people with the disease may only have mild symptoms, making it easily confused with the common cold and less likely for an infected person to seek treatment while being an effective transmitter.

Dow Jones Industrial Average
The Dow Jones Industrial Average over the last month. 

Markets have capitulated to the fear that this virus is dangerous and will have an outsized impact on the global economy, already in a much weaker state than market returns suggested. But like all black swans what happens next will determine how serious it becomes. For my own part I believe the virus is serious, but that the 2% mortality rate may only apply to China, and that it is likely lower with a much larger pool of diagnosed people obscuring the data. This is backed up somewhat by the much smaller number of fatalities in other countries, including Japan and South Korea. What black swans really do is expose a society’s resiliency.

Resiliency is something I’ve discussed before, and it comes into play here. Iran is proving to be one of the more virulent places for the disease, with underreporting of people who have contracted it, a number of government officials who now test positive for it, and a number of cases in foreign countries linking back to Iran, the reality is that Iran’s problem is one of resiliency planning compared to richer countries that have well established protocols for dealing with public health emergencies and the money to dedicate to them. By comparison Iran faces long standing economic sanctions while simultaneously engaging in expensive (and somewhat successful) proxy wars for hegemony in the middle east, ignoring wider investment in public infrastructure.

But resiliency covers a wider range of issues. From an investment standpoint diversified portfolios containing a wide selection of asset classes and geographic allocations are safer because they tend to be more resilient, and not through any confusing magic. Debt, both long term and short term, erode resiliency as they eat away at your ability to respond to new problems while shackling you to existing commitments. In terms of managing the economy, interest rates are also a form of resiliency, and the ability to cut rates or raise them speaks to the strength of an economy. A cursory glance at these issues might give one pause, since Canadians have all time records of debt, and an attempt in 2018 to raise interest rates for the wider health of the economy led to a rapid sell off at the end of the year, while in 2019 central banks cut rates almost everywhere to prop up a softening global economy.

COVID-19 is a significant challenge that I believe the world is up for, but as a black swan I suspect its impact will be felt more in its economic fallout. As we move into the second quarter of the year a clearer picture will emerge at just how serious the economic impact of the virus, and efforts to contain it, really have been. Given some of the existing issues within the economy, as well as those currently being stressed by the fraying of international trade, the corona virus has the potential to push economies into recession. At which point all citizens should ask, just how resilient is my country, and just how resilient am I?

Have questions about the resiliency of your portfolio? Please feel free to give me a call or send an email.

Our office: 416-960-5995

My email: adrian@walkerwealthmgmt.com

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

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