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COVID-19: A Black Swan Event

February 28, 2020

In this week's episode of TrendsTalk, CEO Brian Beaulieu discusses the "coronavirus", COVID-19, and it's growing effect on the economy.

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ITR Economics Divider

The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Brian Beaulieu:
Hello. This is Brian Beaulieu, CEO and Chief Economist for ITR Economics and welcome to another edition of TrendsTalk. We're very glad that you could join us today. Today's topic is a Black Swan event that's currently happening as we record this. It's the, or initially, it was called the coronavirus. Now it's COVID-19 and a few other names. We've been spending a lot of time, effort, man hours, looking into what's going on here. Most concerning to us is the manner in which the stock market and the commodities market have both responded. So clearly on the downside. S&P 500 at this time has moved into a correction market trend status. It's down a little over 10%. And oil prices are down, well, they're down about 26% right now.

The health aspects of the COVID-19 were looked at by us also because we had to try and gauge whether this was going to ultimately impact the consumer. Not only from the financial perspective, but also from a health perspective because that would be a whole different force being exerted on the consumer. And the bottom line to our concern is, obviously, if the U.S. consumer isn't consuming, this thing is going to unravel pretty quickly because of this Black Swan event.

Our analysis, and we're not M.D.s, we're economists, but our analysis is that the U.S. is in good shape to weather this viral storm, so to speak. It's not like we are in China or any place like that. We have an excellent healthcare system. We're out in front of this thing and we just have systems in place that make it more palatable for us in terms of being able to weather this storm. The fatality rate outside of China is about 0.7% on this thing. Clearly, older folks with respiratory ailments are more prone to succumbing. But so far about 80% of all cases worldwide fall into the mild category, which would be sore throat, fever, coughing.

So we put aside the health issue and I come back to looking at that stock market and the oil market. Going back to 1990, there were four rotations where both these trends were negative at the same time and we actually found ourselves in a full fledged recession. And that's obviously something that we are concerned about here at ITR. We want to be able to get out in front of this thing and warn our clients if something like that is coming. Looking at the last four occasions where oil prices and stock prices were going down, two out of the four did not result in a downturn. In 2011 and in 2018, we had both the stock market correction going on and oil prices going down, yet GDP and domestic activity both continued to primarily move higher.

So we started digging into what's likely going on there and the bottom line in that is that as painful as the S&P 500 and the Dow decline has seemed so far, because the points are coming up and indexes are impressive, we haven't seen enough percent decline to trip the recession wire. And we would need oil to go down to about 37, $38.00 a barrel before we would trip the oil wire along with the S&P 500 wire. And right now, oil is trading at, I think it's about 46 when I looked earlier this morning.

So what does this all mean for us, our clients more importantly? We think, based on what was going on in the leading indicators and looking at the economic health of the world, that China's in for a tough couple of quarters. The U.S. is probably in for a tough 1Q20 and extending into 2Q20, but that's consistent within our extending forecast anyways. It's just going to be exacerbated, we think, because of supply chain issues with so many things coming out of China. Anecdotally, American consumers are already dealing with that in that, for instance, GM is buying U.S. made parts to replace the ones that were previously coming out of China.

And that brings me to another point of all this. This is likely to increase and accelerate the process by which U.S. companies are looking for U.S. sourced product and therein lies opportunities for firms in the United States. This is likely going to accelerate China's push toward automation also, which is going to be very interesting because in China, like in the United States, that has political contentious overtones. And it will be interesting to see how that plays out.

Expect the world and the U.S. will rebound from this in the second half of 2020. That's our projected timeline. Therefore, be the good economist or a good capitalist, who understands that when other people are afraid, buying opportunities present themselves. You want to sell high in order to buy low. There's a nice low coming up in terms of business valuations, perhaps, certainly in terms of the stock market, in terms of people's expectations. And we're not going any place.

We are going to recover from this. In fact, some of the higher end mathematical models are suggesting that COVID-19 is a seasonal phenomena and that means we'll have time to get the treatment through the clinical trials that are currently underway. We'll have time to develop the vaccines. It typically takes about 18 months and we can logically do since we've already taken the DNA apart to figure out what makes the virus tick.

So all of these things are good markers and tell us that stay the course. Look for the opportunities. Be careful about your expenses here, in the first half of 2020, but don't give up on this future. There's still a nice rising trend ahead of us. We're just getting pummeled, here, as we go through the trough of this business cycle. Thanks for listening to me, Brian Beaulieu, CEO, Chief Economist for ITR Economics. This has been another edition of TrendsTalk.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.