Reactions to the virus (e.g., “social distancing”) will probably cause a big short-term economic decline followed by a rebound, which probably will not leave a big sustained economic impact. The fact of the matter is that history has shown that even big death tolls have been much bigger emotional affairs than sustained economic and market affairs. My look into the Spanish flu case, which I’m treating as our worst-case scenario, conveys this view; so do the other cases.
Global equity markets may have underestimated the economic effects of a potential COVID-19 pandemic because the only historical parallel to it is the 1918 flu pandemic (which is likely worse than COVID-19 due to a higher fatality rate) and stock markets didn’t drop that much. But maybe traders haven’t taken into account (and I just realized this) that there was war-time censorship in effect which strongly downplayed the pandemic and kept workers going to factories, which is a big disanalogy between the two cases, so markets could drop a lot more this time around. The upshot is that maybe it’s not too late to short the markets.
I also find it curious that unlike past major market drops (such as the 2008 financial crisis) no money manager has become famous from predicting it ahead of time and making money from it. The only one that comes close is Michael Burry but he is apparently just managing his own money now and it sounds like he just had a general bearish bet that wasn’t specific to the coronavirus.
In a March 3rd post Dalio wrote:
This is consistent with my earlier guess:
I also find it curious that unlike past major market drops (such as the 2008 financial crisis) no money manager has become famous from predicting it ahead of time and making money from it. The only one that comes close is Michael Burry but he is apparently just managing his own money now and it sounds like he just had a general bearish bet that wasn’t specific to the coronavirus.