January 31, 2020
Global markets sold off this week as traders remained fixated on developments surrounding the coronavirus outbreak in Wuhan, China. The dip comes despite governments, world health organizations, and companies aggressively mobilizing to ease the public’s concern over the outbreak. Travel bans have begun being implemented, and several airlines have ceased operations to China entirely. While this remains a predominantly China focused event thus far, governments worldwide have begun implementing quarantines and the monitoring of travelers from China for possible coronavirus symptoms. Meanwhile, medical researchers and drug companies have moved at breakneck speed to bring potential vaccines to market. With the world’s eyes trained on China, reports on Q4 2019 U.S. GDP and the Federal Reserve’s Federal Open Market Committee meeting were summarily ignored. For the week, the S&P 500 fell -2.00%.
U.S. Economy Posts Modest Gains in 2019
The Bureau of Economic Analysis announced the U.S. economy grew 2.30% in 2019. That was down from the 2.90% GDP increase in 2018 and the 2.40% increase notched in 2017. The modest growth in 2019 was restrained by the U.S.-China trade war which weighed significantly on business investment throughout the year. This weakness was particularly evident in Q4 2019, where real GDP only expanded 2.10% over Q3 2019. Poor business investment managed to offset otherwise healthy consumer spending gains. While Q4’s figures were lackluster, it still appears there was steady momentum as we entered the early part of 2020. The Wuhan virus has certainly thrown a wild card into the overall calculus for global growth, but with the USMCA agreement and Phase 1 U.S./China deal now having been inked, some of the structural problems hanging over markets in 2019 have at least lessened.
Traders Bet Fed Will Give Market a Shot in the Arm
The Federal Reserve held its first Federal Open Market Committee (FOMC) meeting of 2020 this week. In a widely expected move, the central bank announced it would hold interest rates steady in a range of 1.50% to 1.75%, and it reiterated its commitment to hold rates steady throughout the year. Traders were closely tuned into the Fed’s assessment of the economy for hints of possible policy changes in light of the coronavirus outbreak. The Fed provided a mixed outlook, noting that consumer spending growth had moderated from its December meeting while business investment remained weak. The central bank went on to say it would closely monitor the coronavirus outbreak as it could potentially disrupt economic activity in China and elsewhere. Those comments prompted some traders to place their bets on an additional rate cut soon. The CME’s FedWatch Tool now predicts a nearly 70% chance of at least a 0.25% rate cut at the Fed’s July FOMC meeting.
On Friday, it was announced that the illnesses from the Wuhan contagion had surpassed the total number of infections documented during the entire SARS epidemic – a rate nearly five times faster than its predecessor. That, in conjunction with the fact that China’s role in the global economy is vastly greater than it was in 2003 – now holding the #2 spot in the world economy – had investors bracing for impact this week. Analysts at Capital Economics are now predicting that even with the aggressive international response to the virus, the economic toll from the coronavirus will be at least as great as that of SARS. It now seems apparent that there will be some economic disturbance from this event, which could result in a broader downturn. Historically, however, these have been fairly short lived and the deeper markets have fallen in response to illness-related events (SARS, swine flu, Zika), the steeper their recoveries have been. There are no guarantees of course that this will be the case this time around, but we continue to believe the near-term shift in sentiment presents better opportunities for patient investors than what we’ve seen recently.
The Week Ahead
The coronavirus outbreak and attempts to contain it have dominated headlines. The number of cases has surpassed 9,800 in just two months and there have been 213 reported deaths. Unlike many previous outbreaks of viruses worldwide, research to find a vaccine for the Wuhan coronavirus was underway within hours of the virus being identified due to advances in molecular technology and bioinformatics — applying information technology to biological, medical, and health research.
Chinese officials were able to release the genetic code for the virus very quickly to research teams and labs around the world. The genetic code helps scientists determine how a virus might mutate and how to protect people from it. Another boost to the rapid race to a vaccine is the formation of the Coalition for Epidemic Preparedness Innovation (CEPI) which was created in 2017 at the World Economic Forum meeting in Davos, Switzerland. Global leaders realized the need for a rapid response alliance to expedite vaccine development during an epidemic, and the goal of CEPI is to shorten the time from gene sequencing to clinical testing of viable vaccines to 16 weeks when there is a new viral or bacterial pathogen that threatens public health.
It took researchers about 20 months to go from genetic sequence to the first phase of human trials against the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, and six months to develop a vaccine candidate for the Zika epidemic in 2015. The new strain of the coronavirus — called 2019-nCoV — was identified in December 2019. On January 10th, Chinese scientists posted the genetic makeup of the virus on a public genetic sequence database. The genetic code allows scientists to start vaccine development without needing a sample of the virus.
CEPI provided a grant of up to $9 million to develop a Wuhan coronavirus vaccine to several labs, including Inovio Pharmaceuticals in San Deigo, CA, Moderna in Cambridge, MA in conjuction with the National Institutes of Health, and to researchers at the University of Queensland in Australia. Each team of researchers uses different technology in the race to develop a vaccine as quickly as possible since it’s not known which vaccine will be viable.
Dr. Kate Broderick with Inovio said that once they downloaded the sequence from the Chinese government, they were able to design a vaccine within three hours. Inovio hopes to have it ready for human testing this summer. Moderna expects their vaccine to be ready for an early-stage clinical trial in three months. The Queensland University group said their vaccine may take up to six months.
The race to develop a Wuhan coronavirus vaccine and to combat the epidemic is being supported by numerous private philanthropists, in addition to CEPI. Earlier this week, Jack Ma, founder of Alibaba and China’s richest man, donated $15 million to the effort. Several other Chinese tech companies have together pledged $155 million. In U.S., The Bill and Melinda Gates Foundation announced it would commit $10 million.
Officials do not yet know if a vaccine will be available in time to stop the current epidemic or if the outbreak may be over before a vaccine is available, but it’s clear that advances in science and in global cooperation have accelerated response times and made this amazing race possible.