February 24th, 2020
My research on COVID-19
Markets opened with a steep decline this morning, with the Dow falling over 1,000 pts and the Nasdaq losing over 4%. A surge of new COVID-19 cases in Italy, South Korea, and Iran is at fault. The World Health Organization issued a statement this afternoon that COVID-19 is not yet a pandemic, yet this did little to calm markets.
The enigmatic virus is often compared to a flu in terms of severity; however, several characteristics cause us concern. Asymptomatic transmission means people can transmit the virus to others before exhibiting symptoms. COVID-19 also has a relatively high R0 (R-Naught) or infection rate, estimated at 4.08 by the Chinese Academy of Sciences, the mean result of studies is 3.28 and median 2.79. For example, an R-Naught of 1 means each person is likely to transmit the virus to 1 other person. For reference the seasonal flu has an R-Naught of around 1.3. While we don’t have a firm number for COVID-19, other corona viruses have been known to live on a contaminated surface for up to 9 days. All of this means the virus is highly contagious, and many of the nations where it is spreading are ill-prepared to take proper containment measures.
Now for some positive news: in the case of other corona viruses hot weather tends to significantly slow virus transmission, so seasonality may help. Case fatality rate is low (estimated at about 2.3%), with most fatalities centered around elderly and those who are immunocompromised. That said, the H1N1 virus killed 50 million people in 1919 with a fatality rate below 5%
The concern for financial markets stem from anticipated declines in overall economic activity. China has shut down production in some key regions in attempt to slow transmission of the virus. Less people are expected to travel. Keep in mind China is a critical piece in the global economy. One interesting and unconventional method to measure the slow in production: pollution. A study found that pollution in China has decreased 20-25% from the same time last year, and coal consumption (used to power China’s manufacturing plants) is down 40%.
That we are in the late stages of the economic cycle (the last real economic calamity was in 2008, as compared to an average 4.7 years between recessions) causes us additional concern. The risk is somewhat diminished by the market’s expectation that central banks (including the federal reserve) will come to the rescue with lower interest rates or liquidity. It feels likely that Powell will remain accommodating to the market at least until post-election.
We grappled with the decision to “buy the dip” or to continue reducing risk exposure. Ultimately we decided to take a creative approach:
COVID-19: Inovio PharmaceuticalsInc. (INO), Gilead Sciences Inc. (GILD), and Johnson & Johnson (JNJ) have been added to portfolios. Inovio is working on developing a vaccine and Gilead’s drug Remdesivir may already be effective at treating COVID-19. JNJ is working on a treatment and is a major product of medical supplies which are being stockpiled around the world.
Hedge: To hedge against a broad market decline we have added precious metals, long term treasuries, and tail risk positions. We also reduced overall portfolio risk allocations based on each individual client’s risk tolerance and long-term objectives.
Overall we have adjusted portfolios to attempt to hedge risks related to COVID-19 and abroad market decline. If you would like to discuss your portfolio, or make changes to your investment strategy or risk profile please feel free to contact me directly.
CEO & Managing Partner
Harman Rogowski & Associates
 (Tan, 2020)
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