‘Colonel Jessop, did you order the Code Red?’ shouted the young Lt. Kaffee (Tom Cruise) in the movie ‘A Few Good Men’. ‘You want answers!’, came the response. ‘I am entitled to it; I want the truth’, said Tom, still shouting at the peak of his voice. ‘YOU CAN’T HANDLE THE TRUTH’ says Col. Jessop before launching into a monologue that has a fan-base of its own.
To me, as hair-raising the scene was (strongly recommend you watch it), the dialogue seems so relevant to the financial markets today. It is as if Col. Jessop has ordered the Code Red on the markets (Dow Jones fell more than 12% in less than 10 days—taking global markets down with it)
And it doesn’t appear that we are ready to ‘handle the truth’ just yet. Like market participants turn into economists before budget and psephologists before elections; it seems many of us have become infectious diseases specialists these days – trying to latch on any report on the COVID-19), and hoping that the markets are over-reacting.
Firstly, let me admit that I know little about COVID-19, or viruses in general.
Yet, to me, the fact that seasonal flu kills over half a million people across the globe doesn’t make it more dangerous than COVID-19.
It is not about how many people perish; it is about how fast can the virus spread.
The Basic reproduction number of the virus (R 0 – pronounced, R nought) can be thought of as the expected number of cases directly generated when everyone is susceptible. The larger the value of R 0, the harder it is to control the epidemic.
The COVID-19 R 0 is estimated currently at 1.4–6.6. If left unchecked, the model that an epidemic follows is exponential (and not linear).
If one person can infect 6.6 people, and they, in turn, can infect 6.6 people, that’s 44 people in just two runs. You can do the math of this exponential equation. It certainly, is no laughing matter.
Now that we are here, does it explain the fall we saw in the markets? Will the global machinery slow down enough to create the scare that it has? Not really.
Typically, we are harmed far less by the actual outcome, than by our feelings of it. Yes, the China PMI numbers were not great, but in a shutdown like the one we saw, we didn’t expect it to be stellar anyway.
Also, once the virus starts impacting human hosts as badly as COVID-19 has, scientists work overtime to create a cure, prevention and vaccine for it (there are 320,000 types of viruses found in mammals alone; you cannot have a vaccine beforehand for every virus).
Lastly, with the weather getting warmer, the ability of the virus to spread reduces; and European summers are when the tourist activity picks up.
The market reacts so sharply, in part, is on account of the presence of algorithms and computer trades, especially in the US. The rest of the markets follow the US, and then it becomes a self-fulfilling prophecy. COVID-19, the scare and the market fall is a good story.
The facts, on the other hand, as I explained before are different. A historical perspective is in order—the 7.3% fall in Nifty last week was the worst fall in a decade. When we previously had such sharp cuts in a week (in Feb16, Aug11 and Nov11), Nifty returned between 14-25% in one year, and between 46% and 71% in three years.
Don’t let the fear grip you; don’t follow the herd in their mentality. Evaluate well and Invest wisely.