COVID-19 related fear has gripped markets, driving the Dow Jones Industrial Average and the S&P 500 Index into bear territory. As difficult as these markets are for all of us, there are reasons to be reassured coming out of China, specifically in Wuhan, the epicenter of the outbreak.
Yesterday in a sign of an improving situation in Wuhan, the last two of 16 temporary hospitals built to help COVID-19 patients were shut down. The last patients were discharged to cheers from onlookers as containment measures put in place appear to be working well to curb the spread of the virus, with only 15 new cases reported yesterday. The city has been on lockdown for more than 50 days now.
“Historically in pandemics, stocks have usually begun to recover as the number of new diagnosed cases stabilized, not necessarily even declined,” said LPL Financial Managing Director and Chief Investment Officer Burt White. “While this volatile enviroment is challenging, it can also present opportunities for suitable investors, as we still have confidence in the long-term fundamentals and prospects for the US economy.”
As shown in the LPL Chart of the Day, the S&P 500 Index’s reaction to the outbreak was somewhat muted when it was viewed as a China-only issue, with the potential to affect global supply chains, but volatility increased as the number of cases outside China spiked.
The number of new daily cases in China since beginning of the outbreak resembles a somewhat flattened bell curve. This distribution conforms to Farr’s Law, formulated in the 1800s by British epidemiologist Dr. William Farr, which predicts that epidemics normally follow a pattern of sharp increase, a peak, and then a decline back to a baseline. The reason for this pattern is that humans modify behavior to avoid getting sick and those who are sick seek medical attention leading to decline in new cases. There are good reasons to believe that this pattern will persist in other countries fighting major outbreaks as behaviors are modified through social distancing, quarantines, and other preventative measures put in place by local governments.
We continue to monitor this situation closely and will to report back to you frequently with progress toward containment as the bottoming process for markets unfolds.
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