Impact of Coronavirus Pandemic

03/24/2020 9:42 am EST

Focus: TECHNICAL

Al Brooks, MD

Professional Trader, Author, Lecturer, Brooks Price Action, LLC and Brooks Trading Course

The virus will likely continue to grow until enough people get it and recover creating a herd immunity, reports Al Brooks.

At the start of March, when there were not even 100 U.S.  cases of Coronavirus, I said that it was going to be a huge disaster. I said that between 30% and 60% of the country would probably be infected and that millions could die.

Although I am an eye surgeon, I had a subspecialty that included infectious diseases. I did not see how a pandemic was avoidable. The early data showed that the average patient infected three people and that the number of cases was doubling every three to six days. If you do the math, that means one person, then three people, then nine, etc. Within a few months, that exponential growth meant millions of infections.

Furthermore, there is no effective treatment and a vaccine is at least a year away. That is why I said that 3 billion people worldwide could ultimately be infected, and this was probably going to be the worst pandemic since 1919.

Herd immunity

Life is going to change again in a month or two. The number of infections in the United States will soon be in the millions and probably tens of millions. The odds are very high that a person cannot catch it again. Therefore, all of those people who recovered will be immune. They will no longer have restrictions because they cannot catch it and cannot spread it.

Once we reach some magic number of recovered patients, there will be fewer people to spread the virus. This is called herd immunity. For many virus outbreaks, true herd immunity, enough to prevent an epidemic, is about 95% of the population. That is not going to happen with the Coronavirus. But once about 10% of the population recovers and is immune, restrictions will get less for everyone. This will continue to improve until there is a vaccine. At that point, life will be back to normal.

I think it is helpful to look at the Spanish Flu pandemic of 1919. It began in the spring. As summer came, the number of new cases started to shrink. People thought the pandemic ended. But then in the fall, the flu returned and was as bad as it was in the spring. Yes, I think the immediate crisis will be getting a little better by the end of May. But it is a mistake to assume that the pandemic has ended until after there is a vaccine next year.

I want to make one final point. Everyone assumes there will be a vaccine, like for the flu and measles. It is important to remember that there is no vaccine for HIV, which is a virus. While unlikely, scientists might discover that they cannot create an effective vaccine for the Coronavirus either.

Many heroes

I think that the governors have been bold, courageous, and proactive. They have done a great job in leading us through this and creating our path forward.

Unfortunately, their isolation plans will not stop the inevitable. About half of all Americans will get infected. But their plans will slow the growth rate and that will save lives. There are not enough ventilators to treat a surge in patients. If the healthcare system gets overwhelmed like it did in Italy, far more people will die.

I want to also say that many people are doing great things to help all of us. Farmers, truckers, grocery and pharmacy store workers, everyone at any medical facility, anyone whose job requires them to be exposed to the public, and even all of the Americans who are simply doing their jobs and trying to avoid getting infected, and especially trying hard to not infect others.

There has not been a national challenge like this since World War II. It was easy to assume that we did such a great job building our society that we would never face a national crisis of this scale. Life humbles everyone at some point, including societies that have enjoyed their hubris. But despite the hardship, it is nice to be reminded of how good people can be.

Economic impact: We are in a recession

There are many ways to determine if an economy is in a recession. The most widely used is to look at the GDP growth rate. If it falls for two consecutive quarters, the economy is shrinking. The news will declare that we are in a recession. But that diagnosis comes about six months after the recession began.

We see that the economy is shrinking. Everyone has cancelled hotel, air, and cruise reservations, and no one is going to restaurants or the mall. Consumer spending is way down and millions of people are getting laid off. Unemployment could reach 10% or more. Remember, the outlook for Q1 GDP was only about 1.5% growth prior to the outbreak. It only takes a relatively small economic downturn to move GDP from under 2% to negative We are in a recession. The country is making much less money and there is no reason to think that it will expand again for many months.

America is still in shock. This will last for a couple more months. When do we know that a big bear rally will begin? I will use toilet paper as a barometer. When Walmart (WMT) and Costco (COST) start having toilet paper again, then America is less scared. That should lead to a bear rally, which could last many months.

A bear market has consequences that last a long time

The S&P 500 entered a bear market last week when it closed 20% below the all-time highest close. When there is a bear market, the final low typically comes about a year later. If there is a strong rally within the next couple months that is similar to the one in 2019, traders will assume that it will form a lower high. It will not be a resumption of the bull trend. Expect at least one more new low in about a year.

In addition, that new low will probably be 40% to 50% below the old high. That means there would have to be a 50% to 100% rally to get back to the old high. On average, it takes two years to get to the old high.

However, I talked about some technical factors in Monday’s S&P report that are problems for the bulls. The economy will probably be stagnant for a decade. It will be difficult for the market to get much above the current high for many years.

There are bigger problems than the pandemic

I keep making the point that the 2017 extreme buy climax and the chaos over the last two years meant that the economy had very serious problems. This is true despite stock pundits and politicians continuing to claim the market would continue a lot higher. The market was telling us for two years that it believed the late stages of the rally were created by unsustainable manipulation rather than corporate earnings. The government and industry could not figure out how to continue the fake bull trend.

The pandemic was the straw that broke the camel’s back. But that poor camel was already carrying too much weight and it was just a matter of time before its back was going to break.

The pandemic will be over in about a year, but then what?

You hear politicians and economists say that the economy is strong, and it will roar back as soon as the pandemic ends within a year. That is because they do not know how to read charts.

Yes, in a few years, the Coronavirus will no longer be a problem. Suppose that I am right, and the stock market is unable to make a significant new high for many years. I bet it will be a decade. What then will the experts say?

They will look back at today and come up with all kinds of reasons to explain that the 12-year bull trend was not based on strong fundamentals. Many will claim that everyone knew that the economy was actually weak, despite the strong stock market. They will explain it by pointing to the Fed’s interventions, stock buybacks, low interest rates, and just about anything else imaginable.

I have a simpler explanation. The most extreme buy climax in history should lead to a decade long trading range, just like every other extreme buy climax did. The charts told us that price got too far ahead of fundamentals. That is the only absolutely certain fact. Any other explanation is sophistry.

Price is truth

There were countless factors that contributed to the buy climax, but who cares? It is impossible and useless to know how much each factor contributed to the buy climax. I’m in this for the money. Those discussions do not help me achieve my goal. All I am interested in is what the charts are saying. Price is truth.

The market will be a trader’s market for a long time, which means it will disappoint buy and hold investors. It will take a decade before the fundamentals catch up to price, allowing the bull trend to resume.

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