(Image: Zen Buddha Silence, by Marilyn Barbone)
March 1, 2020
No one can predict what the stock market will do, even if a recession appears to be unfolding. That said, 2009 to 2019 was a bull market for U.S. stocks. It wouldn’t be surprising if the S&P 500 Index experienced a bear market. Covid-19, the disease associated with the novel virus SARS-COV-2, may cause a U.S. recession—even if mild—which could in turn cause a bear market for U.S. stocks. In fact, a bear market for stocks may already have begun.
Periodically there are bear markets. The important thing for a long-term value investor is to be prepared to buy the most undervalued stocks in the event of a bear market. It’s important to be able to buy when everybody else is selling.
Let’s now look at an article by The Economist, “Covid-19 is now in 50 countries, and things will get worse.” Link: https://www.economist.com/briefing/2020/02/29/covid-19-is-now-in-50-countries-and-things-will-get-worse
The article states:
Studies suggest that the number of people who have left China carrying the disease is significantly higher than would be inferred from the cases so far reported to have cropped up elsewhere, strongly suggesting that the virus’s spread has been underestimated. Some public-health officials still talk in terms of the window for containment coming closer and closer to closing. In reality, it seems to have slammed shut.
The article continues:
As of the morning of February 27th, stock markets had fallen by 8% in America, 7.4% in Europe and 6.2% in Asia over the past seven days. The industries, commodities and securities that are most sensitive to global growth, cross-border commerce and densely packed public spaces got whacked particularly hard, with the prices of oil and shares in airlines, cruise-ship owners, casinos and hotel companies all tumbling. Investors have taken refuge in assets that are perceived to be safe: yields on ten-year Treasury bonds reached an all-time low of 1.3%. The place least hit was China, where a huge sell-off took place some time ago. Investors, like some public-health officials, are starting to think that the epidemic there is, for now, under control… But if economic models developed for other diseases hold good, the rich world stands a distinct chance of slipping into recession as the epidemic continues. That will bring China, and everyone else, a fresh set of problems.
The article adds:
How the virus will spread in the weeks and months to come is impossible to tell. Diseases can take peculiar routes, and dally in unlikely reservoirs, as they hitchhike around the world. Two cases in Lebanon lead to worries about the camps in which millions of people displaced from Syria are now crowded together and exposed to the winter weather. But regardless of exactly how the virus spreads, spread it will. The World Health Organisation (WHO) has not yet pronounced covid-19 a pandemic—which is to say, a large outbreak of disease affecting the whole world. But that is what it now is.
Part of the WHO’s reticence is that the P-word frightens people, paralyses decision making and suggests that there is no further possibility of containment. It is indeed scary—not least because, ever since news of the disease first emerged from Wuhan, the overwhelming focus of attention outside China has been the need for a pandemic to be avoided. That many thousands of deaths now seem likely, and millions possible, is a terrible thing. But covid-19 is the kind of disease with which, in principle, the world knows how to deal.
The course of an epidemic is shaped by a variable called the reproductive rate, or R. It represents, in effect, the number of further cases each new case will give rise to. If R is high, the number of newly infected people climbs quickly to a peak before, for want of new people to infect, starting to fall back again… If R is low the curve rises and falls more slowly, never reaching the same heights. With SARS-COV-2 now spread around the world, the aim of public-health policy, whether at the city, national or global scale, is to flatten the curve, spreading the infections out over time.
If R is low and fewer people are infected, that gives health-care systems more time to develop better treatments, which would mean a lower death rate.
The virus seems to be transmitted mainly through droplets that infected people cough or sneeze into the air. So transmission can be reduced through good hygiene, physical barriers, and reducing the various ways that people mingle. These measures are routinely used to lessen the spread of the influenza virus, which kills hundreds of thousands of people a year. The article continues:
Influenza, like many other respiratory diseases, thrives in cold and humid air. If covid-19 behaves the same way, spreading less as the weather gets warmer and drier, flattening the curve will bring an extra benefit. As winter turns to spring then summer, the reproductive rate will drop of its own accord. Dragging out the early stage of the pandemic means fewer deaths before the summer hiatus and provides time to stockpile treatments and develop new drugs and vaccines—efforts towards both of which are already under way.
Ben Cowling, an epidemiologist at the University of Hong Kong, says that the intensity of the measures countries employ to flatten the curve will depend on how deadly SARS-COV-2 turns out to be. It is already clear that, for the majority of people who get sick, covid-19 is not too bad, especially among the young: a cough and a fever. In older people and those with chronic health problems such as heart disease or diabetes, the infection risks becoming severe and sometimes fatal. How often it will do so, though, is not known.
Epidemiologists estimate the fatality rate of covid-19 in the range of 0.5-1%. This is higher than the fatality rate of 0.1% of the seasonal flu in America. But it’s lower than the 10% fatality rate for SARS, a disease caused by another coronavirus that broke out in 2003.
However, the fatality rate depends not only on the disease itself, but also on the quality of care received. This means that poorer countries are at more risk than richer countries. Moroever, the economic effects of covid-19 will be worse in poorer countries. The article says:
As the pandemic unfolds, the reproductive rate in different parts of the world will differ according both to the policies put in place and the public’s willingness to follow them. Few countries will be able to impose controls as strict as China’s. In South Korea the government has invoked the power to forcibly stop any public activities, such as mass protests; schools, airports and military bases are closed. Japan is urging companies to introduce staggered working hours and virtual meetings, limiting both crowding on public transport and mingling at work. Other developed countries are mostly not going that far, as yet. Something that is acceptable in one country might result in barely any compliance, or even mass protests in another.
The article again:
Some hints of what may be to come can be gleaned from an economic model of an influenza pandemic created by Warwick McKibbin and Alexandra Sidorenko, both then at Australian National University, in 2006. Covid-19 is not flu: it seems to hit people in the prime of their working life less often, which is good, but to take longer to recover from, which isn’t. But the calculations in their model—which were being updated for covid-19 as The Economist went to press—give some sense of what may be to come…
Mr McKibbin says the moderate scenario in that paper looks closest to covid-19, which suggests a 2% hit to global growth. That corresponds to calculations by Oxford Economics, a consultancy, which put the possible costs of covid-19 at 1.3% of GDP. Such a burden would not be evenly spread. Oxford Economics sees America and Europe both being tipped into recession—particularly worrying for Europe, which has little room to cut interest rates in response, and where the country currently most exposed, Italy, is already a cause for economic concern. But poor countries would bear the biggest losses from a pandemic, relative to their economies’ size.
The article concludes:
As the world climbs the epidemic curve, biomedical researchers and public-health experts will rush to understand covid-19 better. Their achievements are already impressive; there is realistic talk of evidence on new drugs within months and some sort of vaccine within a year. Techniques of social distancing are already being applied. But they will need help from populations that neither dismiss the risks nor panic.
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An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: http://boolefund.com/best-performers-microcap-stocks/
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There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
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Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.