[In]Securities Guest Blog: The Fever by Aegis Frumento Esq

March 5, 2020


The Fever

In the spring of 1918, an influenza pandemic broke out around the world. By the time it ended in 2019, 50 million worldwide, and 675,000 Americans, were dead, 0.2% of the entire population. https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html

After skipping the war years, the Asian Flu pandemic of 1957 to 1958 killed 2 million worldwide and 70,000 in the US. https://www.britannica.com/event/Asian-flu-of-1957.

10 years later the Hong Kong flu struck. It left 500,000 dead in Hong Kong alone, and a million worldwide. https://www.britannica.com/event/Hong-Kong-flu-of-1968

From March to July 2003, we were gripped by fear of the SARS epidemic. Actual cases were few, but the mortality rate of close to 10% was very high. ttps://www.cdc.gov/about/history/sars/timeline.htm.

And of course, millions died of HIV/AIDS in the 1980s and 90s.

All of these have two things in common. First all were viral pandemics causing serious concern of illness and death among Americans. 

And second, not one of them had the kind of impact on the US stock market that we saw in the past week.

Statistics from 1918 are hard to get, but it appears that the Dow Jones industrial average went up 8% from 2018 to 2019, and 32% from 2019 to 2020.http://www.fedprimerate.com/dow-jones-industrial-average-history-djia.htm. The market was basically flat through the entire Asian flu pandemic, never up or down cumulatively more than about 4% during an entire two-year period. Likewise during the outbreak of the Hong Kong flu, the S&P 500 was pretty much flat. During the SARS scare, the market never lost more than about 2% of its value, which it quickly made up. You can look all this up yourself at https://finance.yahoo.com/quote/%5EGSPC/history?period1=-1325635200&period2=1582934400&interval=1wk&filter=history&frequency=1wk.

So when I read the screaming headlines that attributed to last week's 15 percentage point drop in the market indices to the outbreak of the coronavirus Covid-19, my initial reaction was, since when? That has never happened before in reaction to any of the other pandemics of the past 100 years.

There have been about 3,000 deaths worldwide out of approximately 90,000 reported cases of Covid-19. However, it seems that 80% of all cases are without symptoms or so mild as to go unattended. https://www.businessinsider.com/coronavirus-80-percent-cases-are-mild-2020-2. Those are never counted. That means the 90,000 reported cases implies another 360,000 unreported cases. The number is probably much higher than that, when you consider that only about 500 people in the entire United States have even been tested so far. Epidemiologists believe that as many as 70% of us will catch it eventually, despite our best efforts to stem the tide. https://www.theatlantic.com/health/archive/2020/02/covid-vaccine/607000/.

So far, though, nine persons have tragically perished by the disease in this country. Surely there will be more. But meanwhile, 16,000 have died of the plain ordinary run-of-the-mill flu so far this season. https://www.cdc.gov/flu/weekly/index.htm#ILIActivityMap.  By any measure, the seasonal flu poses a far greater risk than the new coronavirus.  https://www.businessinsider.com/wuhan-coronavirus-lesser-threat-to-americans-than-flu-2020-1. For that matter, so does driving your car. We just don't to see it, because probability analysis is not intuitive.

My point here is not in any way to diminish the threat of Covid-19, or the fear that it evokes. My point is that the markets couldn't care less. That is because markets, unlike humans, do calculate probabilities correctly. That is why they have not historically reacted to pandemics, not even pandemics much worse than this one. I saw an interview with Michael Bloomberg the other day, when he was still a candidate, in which he opined that the markets were spooked because they 'don't like uncertainty.' Sorry Mayor Mike, but that's just dead wrong. Uncertainty is what markets are all about. Markets factor in uncertainty. The wisdom of the crowd discounts future uncertainties into the market price. Pandemics are certainly one of those uncertainties that, throughout history, markets have taken in stride because they already priced them in.

Moreover, there wasn't even any uncertainty about this pandemic. In 2017, the Centers for Disease Control warned, "While we can't predict exactly when or where the next epidemic or pandemic will begin, we know one is coming."  https://www.cdc.gov/globalhealth/healthprotection/fieldupdates/winter-2017/why-it-matters.html. That same sentiment was widely reiterated in 2018, (see https://foreignpolicy.com/2018/09/28/the-next-pandemic-will-be-arriving-shortly-global-health-infectious-avian-flu-ebola-zoonotic-diseases-trump/), and again in 2019 (see https://apps.who.int/gpmb/assets/annual_report/GPMB_annualreport_2019.pdf). To suggest that the market would be surprised by the arrival of a new virus, even one as harmful as Covid-19 might turn out to be, is simply not to understand what markets do. If you want to see a real example of a surprised market, look at what happened after 9/11.  The market lost 11% that first week, but gained it all back within two weeks after.

That may still happen here, too -- but I doubt it. Yes, something spooked the markets last week, but I don't buy that it was the coronavirus. To apply Occam's Razor, I think the market is simply overvalued. It is wobbling on such a peak that any little thing can trip it into falling. Fear of an epidemic is as good an excuse as any. See, e.g., https://www.nytimes.com/2020/03/02/opinion/coronavirus-economy-recession.html. I'll leave it to others to speculate as to why the market is overvalued. That it is being propped up by Trumpian smoke and mirrors is my own personal explanation.

As of yesterday, the market had recovered about half its losses. That coincided with the announcement of a cluster of more coronavirus cases in New York and California. So the market crashed because of the outbreak of Covid-19, but recovered because more cases of Covid-19 appeared? No. More likely it cheered the news that Joe Biden will probably be the Democratic nominee, so we won't have to choose in November between revolting and revolting. To have that fever break is as good a reason as any to feel optimism.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.

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