Subscribers are posing questions about the 2019 coronavirus (COVID-19) as a driver of current market conditions that are difficult to address with evidence-based analyses. Here are some questions and thoughts:
Can infection trajectories of recent novel diseases such as Swine Influenza, Ebola Virus Disease, Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) tell us how much and how long the Coronavirus-19 pandemic will affect financial markets. Thoughts:
- The sample of novel infectious diseases is very small for inference.
- Comparing the severity (mortality and infectiousness) of these diseases is problematic.
- Comparing actual infection trajectories of these diseases is similarly problematic with information found so far.
- COVID-19 seems to have much greater attention from media and politicians than prior diseases, as though it is a proxy for multiple agendas more connected to financial markets than a disease alone.
When will financial markets bottom? Thoughts:
- The bottom may come as new COVID-19 cases begin to decline, perhaps in a few weeks.
- Governmental and personal-en-masse actions taken so far to suppress contagion are likely to depress earnings of many companies across industries for at least two quarters, with reporting of publicly held firms concentrating in April and July. The bottom may come when investors see this bad news.
- It is a U.S. presidential election year, which injects uncertainty into financial markets through October. The bottom may come after COVID-19 infections subside, as the election approaches and anxiety about who will be leading the economic/monetary aftermath peaks.
A market expert asserts that two key financial conditions now are similar to those at the market bottoms of 1987, 1998, 2002 and 2009. Are we there?
- While it is possible that a few financial variables are now critical, with a sample of just four crashes and hundreds or thousands of variables to consider, the potential for false discovery of “accurate” predictors seems high.
- Recall Guru Grades.
The above are thoughts and ideas only. The number of crashes is (by definition) very small for statistical analysis.
