The Most Common Sense Way To Stop Spreading the Virus (#masks4all)

Executive Order To Slow Spread. The President of the United States should issue an executive order immediately requiring everyone to wear surgical masks or washable DIY masks made from cotton t-shirts when they go out. Along with social distancing and widespread testing, #masks4all is likely to dramatically slow the spread of the COVID-19 virus.

Experts Changing Their Minds on Masks. In our March 25 Morning Briefing, we wrote: “Hopefully, social distancing for a few weeks and widespread testing will allow us to return to our normal lives in a few weeks. Meanwhile, we should produce billions of surgical masks to wear when we venture out of our homes. Indeed, the government should mandate that everyone wear a mask outside their homes until the crisis passes. Authorities are doing that in many places in Asia now. ….

“Yes, we know: The Centers for Disease Control and Prevention (CDC) does not recommend that the general public wear N95 respirators or surgical masks to protect themselves from respiratory diseases, including COVID-19. In particular, the latter don’t filter or block very small particles in the air transmitted by coughs and sneezes. However, a friend in the medical supply business tells us that they are effective in stopping the release of those particles by infected people who wear them. Surgeons wear masks to protect patients from their mouth-borne germs, not the other way around. The CDC warning seems to be about saving the masks for the hospital workers. The solution is mass production in the millions per week.”

Subsequently, medical experts have changed their minds: They now think we should wear face masks. Their advice is laid out in a new report in Science magazine. Even the CDC is coming around, according to a March 30 article in the The Washington Post titled “CDC considering recommending general public wear face coverings in public.” Here is the relevant excerpt:

“CDC guidance on masks remains under development, the federal official said. The official said the new guidance would make clear that the general public should not use medical masks — including surgical and N95 masks — that are in desperately short supply and needed by health-care workers.

“Instead, the recommendation under consideration calls for using do-it-yourself cloth coverings, according to a second official who shared that thinking on a personal Facebook account. It would be a way to help ‘flatten the curve,’ the official noted.

“Such DIY cloth masks would potentially lower the risk that the wearer, if infected, would transmit the virus to other people. Current CDC guidance is that healthy people don’t need masks or face coverings.

“At the daily White House briefing Monday, President Trump was asked if everyone should wear nonmedical fabric masks. ‘That’s certainly something we could discuss,’ Trump said, adding, ‘it could be something like that for a limited period of time.’”

Models Support Universal Masking. A doctor friend claims that if everyone wore a mask, the pandemic would end in a matter of a few weeks. This view jibes with a March 2019 study titled “Modeling the Effectiveness of Respiratory Protective Devices in Reducing Influenza Outbreak.” Here is a very relevant excerpt:

“Outbreaks of influenza represent an important health concern worldwide. In many cases, vaccines are only partially successful in reducing the infection rate, and respiratory protective devices (RPDs) are used as a complementary countermeasure. In devising a protection strategy against influenza for a given population, estimates of the level of protection afforded by different RPDs is valuable. In this article, a risk assessment model previously developed in general form was used to estimate the effectiveness of different types of protective equipment in reducing the rate of infection in an influenza outbreak. … An 80% compliance rate essentially eliminated the influenza outbreak.”

Jeremy Howard, a research scientist at the University of San Francisco, found 34 scientific papers indicating basic masks can be effective in reducing virus transmission in public—and not a single paper that shows clear evidence that they cannot. In a March 28 op-ed in The Washington Post, he wrote:

“Masks don’t have to be complex to be effective. A 2013 paper tested a variety of household materials and found that something as simple as two layers of a cotton T-shirt is highly effective at blocking virus particles of a wide range of sizes. Oxford University found evidence this month for the effectiveness of simple fabric mouth and nose covers to be so compelling they now are officially acceptable for use in a hospital in many situations. Hospitals running short of N95-rated masks are turning to homemade cloth masks themselves; if it’s good enough to use in a hospital, it’s good enough for a walk to the store.”

DIY in Czech Republic. The March 30 issue of The Guardian reports: “Czech citizens have mobilised in a national effort to make and distribute home-made masks after the government decreed face-wear mandatory for everyone in an effort to combat the coronavirus pandemic. The government, led by the prime minister, Andrej Babiš, has trumpeted mask-wearing as vital in controlling the spread of the virus and has urged other governments to follow suit. The Czech Republic and neighbouring Slovakia are the only two countries in Europe to impose mandatory mask-wearing...”

Taiwan’s Masks. Wearing masks to eliminate the virus pandemic seems to be working in Taiwan, which has a population of 23.8 million. Taiwan is right next to mainland China, and lots of businesspeople and tourists travel between the two countries. Indeed, hundreds of thousands of Taiwanese work and invest in China.

As of yesterday, Taiwan had just 306 cases of COVID-19 and five deaths! Consider the following points gleaned from a February 10 VOA article titled “Taiwanese Scramble for Face Masks to Stop Deadly Virus From Nearby China”:

(1) The island nation has a dense population where multiple generations live under the same roof. The Taiwanese are prone to influenza and a contagious gastrointestinal illness that has killed small children. They also recall the severe acute respiratory syndrome (SARS) epidemic of 2003. SARS originated in China and spread to Taiwan, killing 73 on the island.

(2) The disease-wary Taiwanese tend to wear surgical masks as a precaution against airborne pathogens at higher numbers than people elsewhere. In Taipei, a city of 2.6 million, 50% of people routinely wear face masks.

(3) The island’s 80 mask producers have raised production recently to meet rising demand amid the COVID-19 pandemic, despite a rationing of sales to ensure that no one hoards the supplies.

(4) Demand for surgical face masks—to prevent cough-borne COVID-19 droplets from landing on others—has surged throughout East Asia. That’s particularly true in Malaysia and Thailand, which get high numbers of Chinese tourists. Malaysia, with a population of 32.3 million, has had 2,626 cases of COVID-19 and 37 COVID-19-related deaths. Thailand has a population of 69.7 million, 1,524 cases, and 9 deaths.

We will survive this crisis. But let’s not lose our minds, our jobs, and our businesses without considering our options and the consequences of our actions.

Stock Market Fears Virus of Socialism Almost as Much as COVID-19

I’ve been asked several times since last week’s stock market correction whether the selloff might not be just about the COVID-19 virus outbreak. Might the emergence of Bernie Sanders as the Democratic party’s frontrunner—and the possibility that it will be a “democratic socialist” running against Donald Trump in the general election—in part explain the stock market rout? The S&P 500 peaked at a record high of 3386.15 on Wednesday, February 19. It plunged 12.8% to 2954.22 on Friday, February 28. There were lots of headlines about the spreading virus that coincided with the plunge in stock prices. However, also coincidently, Bernie won the New Hampshire primary on Tuesday, February 11.

Sanders took New Hampshire with the support of a majority of the voters aged 18 to 29, winning 51% of their votes. Former South Bend, Indiana, Mayor Pete Buttigieg trailed him with 20% of the youth vote, followed by Massachusetts Senator Elizabeth Warren at 6%. On Saturday, February 22, Sanders had another big win in the Nevada primary. Last week, Sanders had the momentum, and the market plunged.

But then on Sunday, March 1, Joe Biden handily beat Sanders and the other contenders in the South Carolina primary, with lots of support from black voters. CNN enthusiastically reported: “Former Vice President Joe Biden’s blowout South Carolina win reshaped the Democratic presidential campaign and positions him as the surging moderate alternative to Vermont Sen. Bernie Sanders in a 48-hour sprint to Super Tuesday.”

On Monday, March 2, Joe Biden welcomed former rivals Pete Buttigieg, Amy Klobuchar, and Beto O’Rourke into his camp in a show of force by the Democratic party’s establishment against frontrunner Bernie Sanders the night before Super Tuesday. Buttigieg and Klobuchar dropped out of the race and threw their support behind Biden, whose decisive win in South Carolina on Saturday appears to have cemented his status as the moderate alternative to Sanders’s democratic socialism.

On Monday, March 2, the S&P 500 jumped 4.6%. The DJIA soared 5.1%, the biggest such gain since March 23, 2009. The Dow’s 1,293.96-point gain was its largest one-day gain ever.

Is it possible that stock market investors may fear Bernie Sanders almost as much as they fear the coronavirus?! Yes, it’s possible. After all, the widespread view is that the virus pandemic will probably abate in coming months. Monday’s stock market rally might also have been fueled by news reports—such as Reuters’ March 1 report—that China’s efforts to halt the spread of the virus are paying off.

Socialism, on the other hand, is a virus that won’t go away even though extreme versions of it have immiserated and killed millions of people since it started to spread after infecting the French during the French Revolution. The philosophical founding father of socialism was Jean-Jacques Rousseau. He inspired Maximilien Robespierre, literally the first politician to execute socialist principles. He headed the Jacobin terrorist group that led the French Revolution during the eighteenth century. He was a big fan of the guillotine. Rousseau said lots of crazy things, but here is my personal favorite:

“There is therefore a purely civil profession of faith of which the Sovereign should fix the articles, not exactly as religious dogmas, but as social sentiments without which a man cannot be a good citizen or a faithful subject. While it can compel no one to believe them, it can banish from the State whoever does not believe them—it can banish him, not for impiety, but as an anti-social being, incapable of truly loving the laws and justice, and of sacrificing, at need, his life to his duty. If anyone, after publicly recognizing these dogmas, behaves as if he does not believe them, let him be punished by death: he has committed the worst of all crimes, that of lying before the law.”

Look it up; it’s in his seminal book The Social Contract (1762), which is appropriately posted on the Marxist Internet Archive. (Hat tip to Mark Melcher and Steve Soukup, my friends at The Political Forum. Read their excellent and provocative book, Know Thine Enemy: A History of the Left, Volume 1, 2018.)

Investors fear Bernie because he wants to cut off the head of capitalism by raising taxes significantly on the rich and using the funds to provide free everything to everybody else. He also wants to regulate everyone. On his website, he promises college for all. He will cancel all student debt and medical debt. He’ll expand Social Security. Medicare will be for all. His program includes housing for all and universal childcare and pre-K. He will embrace the Green New Deal: “Reaching 100 percent renewable energy for electricity and transportation by no later than 2030 and complete decarbonization of the economy by 2050 at latest.” In effect, he will either privatize or destroy the health care and fossil-fuel energy sectors. He will break up any company he deems to be a monopoly.

All we need to know is that Sanders is a fan of Fidel Castro. He said so in a town hall meeting on Monday, February 24:

“[W]hen Fidel Castro first came into power ... you know what he did? He initiated a major literacy program. It was a lot of folks in Cuba at that point who were illiterate. And he formed a literacy brigade ... [they] went out and they helped people learn to read and write. You know what? I think teaching people to read and write is a good thing.

“I have been extremely consistent and critical of all authoritarian regimes all over the world including Cuba, including Nicaragua, including Saudi Arabia, including China, including Russia. I happen to believe in democracy, not authoritarianism. ... China is an authoritarian country ... But can anyone deny—I mean the facts are clear—that they have taken more people out of extreme poverty than any country in history? Do I get criticized because I say that? That’s the truth. So that is the fact. End of discussion.”

Getting everything for free trumps freedom, according to Bernie. No wonder investors are reacting to him as though he is going to infect us all with the virus of socialism.

No wonder that stocks soared on Wednesday as Biden’s major victories during Super Tuesday sparked a massive rally led by the health-care sector

Government Measures To Stop COVID-19 Triggering Pandemic of Fear

Our rapid-response team at Yardeni Research first responded to the coronavirus outbreak in the Monday, 1/27 issue of our Morning Briefing, which was titled “Going Viral?” That was the next business day after the outbreak first hit the headlines on Friday, 1/24. Let’s review some of our initial assessments and the latest developments:

(1) Panic attack #66 could be the one that causes a global recession and a bear market. In our 1/27 analysis, we suggested that the outbreak had the potential to be added to our list of 65 panic attacks since the start of the current bull market: “Will the coronavirus outbreak that started in the Chinese city of Wuhan, Hubei turn out to be just the latest panic attack that provides yet another buying opportunity for stock investors? Fears that it could turn into a pandemic knocked stock prices down last week, especially on Friday.”

The S&P 500 peaked at 3329.62 on Friday, 1/17. It then fell 3.1% through the last day of January. Joe and I added the outbreak to our list of panic attacks on 2/3 (Fig. 1).

The S&P 500 proceeded to rally 5.0% to a record high of 3386.15 last week on Wednesday, 2/19 (Fig. 2). It dropped on Friday of last week, 2/21, by 1.1%, and plunged 3.4% on Monday, 2/24, as reports showed that the virus was spreading globally, particularly to Iran, Italy, and South Korea.

It plunged again, by 3.0%, on Tuesday after an official at the Centers for Disease Control and Prevention (CDC) that day said Americans should prepare for COVID-19 to spread in their communities and cause disruption after Iran, Italy, and South Korea reported a rapid uptick in the number of people who have been sickened.

“We really want to prepare the American public for the possibility that their lives will be disrupted because of this pandemic,” Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, told reporters. She said that Americans should talk to their children’s schools about contingency education and childcare plans and discuss tele-working options at work if community spread is reported in the US.

When asked by a reporter on a conference call if her tone had changed compared to previous calls, the CDC official said: “The data over the last week and the spread in other countries has certainly raised our level of concern and raised our level of expectation that we are going to have community spread here ... That’s why we are asking folks in every sector as well as within their families to start planning for this.”

Messonnier said that she herself spoke to her family over breakfast on Tuesday, and that while she feels the risk of coronavirus at this time is low, she told them they needed to be preparing for “significant disruption” to their lives. (See the Fox News article “Coronavirus disruption to ‘everyday’ life in US ‘may be severe,’ CDC official says.”)

We have come to the conclusion that even if the virus turns out to be no more dangerous to global medical and economic health than previous outbreaks (as we still expect), extreme government responses aimed at containing the virus, while effective, may be creating a pandemic of fear, increasing the risk of a global recession and a bear market in stocks.

(2) To be contained. We expect the coronavirus outbreak to be contained, as the previous three major viral outbreaks were. SARS (2003-04), MERS (2012), and EVD (2014-16) all were contained using traditional public health measures—e.g., testing, isolating patients, and screening people at airports and other public places. Eight months after SARS began circulating, for example, the virus died out. A 2/18 LA Times article explains how SARS, which had reached 29 countries at its peak, suddenly disappeared. The seriousness with which governments and health organizations around the world are taking the coronavirus suggests its spread likewise will be minimized.

(3) People get sick. According to a Live Science article written last week (“How does the new coronavirus compare to the flu?”), the virus, officially “COVID-19,” infected more than 75,000 people and killed 2,000, primarily in mainland China. Not to minimize the suffering behind those numbers, in the US alone, the flu has already caused an estimated 26 million illnesses, 250,000 hospitalizations and 14,000 deaths this season, according to the CDC.

In the largest study of COVID-19 cases to date, China’s Center for Disease Control and Protection analyzed 44,672 confirmed cases and found 80.9% to be mild, 13.8% severe, and 4.7% (2,087) critical. They estimated the death rate at 2.3%; that’s much higher than the death rate from US flu cases, at around 0.1%—but both rates are extremely low. According to the article cited above, nobody under 10 years old has died of this coronavirus to date.

What’s unknown about the new virus is the problem. Nobody knows exactly how it will spread or how many serious cases will develop. “Despite the morbidity and mortality with influenza, there’s a certainty … of seasonal flu,” Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said in a White House press conference on 1/31, according to the Live Science article. The course of the flu is predictable, he said, down to the number of hospitalizations and mortalities to expect before cases drop off in spring. “The issue now with [COVID-19] is that there’s a lot of unknowns.”

(4) The asymptotic difference. Unlike with previous headline-making viral outbreaks, asymptomatic people can have and spread the new coronavirus; that’s less likely with the flu, which spreads mostly from persons with symptoms. Cases have been reported on every continent but South America and Antarctica, most recently in Europe, East Asia, and the Middle East, according to the CDC’s website.

A 2/24 article in The Atlantic quoted Harvard epidemiology professor Marc Lipsitch saying he doesn’t think COVID-19 will prove containable. His “very, very rough” estimate was that 100-200 people in the US were infected (versus 35 cases confirmed cases as of Sunday, 2/23), which would be enough to spread the disease widely. The article observed that Chinese scientists reported an apparent case of asymptomatic spread of the virus from a patient with a normal chest CT scan. If this finding is not a bizarre abnormality, the scientist stated, “the prevention of COVID-19 infection would prove challenging.”

(5) Will warm weather kill the virus? Might the coming warm weather months halt COVID-19’s spread? David Heymann of the London School of Hygiene and Tropical Medicine, who led the global response to the SARS outbreak in 2003, says not necessarily. The MERS coronavirus spread in Saudi Arabia during August, he pointed out. The flu might spread less readily in summer simply because people spend less time together in confined spaces in summertime, per a 2/12 NewScientist article.

Drug manufacturers are rushing to develop a vaccine. On Monday, drug maker Moderna delivered its first experimental coronavirus vaccine for human testing, with a clinical trial scheduled for April.

The bottom line is that we aren’t too afraid of the virus right now. While we are not virologists, our take is that there are two sanguine outcomes: (#1) the virus spreads to lots more people, but most cases are mild, and we learn to live with the threat; and/or (#2) public health efforts and less togetherness during warmer months cause the virus to die out.

(6) Fear going viral. More fearsome than the virus itself is the global contagion of fear it could spawn as governments continue to react with extreme measures and the media continues to hype the threat up. Governments’ responses have been drastic, as discussed in a 2/24 WSJ article; they include China’s quarantine of 60 million people in Hubei province, halting economic activity, and the US’ travel warnings and ban on entry of any non-American who has been to China in the past 14 days. As noted above, just yesterday, the CDC warned Americans to prepare for a severe disruption to everyday life in the US in the event of an outbreak here.

We hope that people soon will have good reasons to conclude, as we have for now, that this too shall pass.

Powell Says Economy Is ‘In a Very Good Place.’ Time To Worry?

Fed I: Balanced MPR. My colleague Melissa Tagg and I read the Federal Reserve’s 71-page semi-annual Monetary Policy Report (MPR) to Congress dated February 7. We concluded that Fed officials believe the US economy is well balanced and that they will keep the federal funds rate in the current range of 1.50%-1.75%. Nevertheless, they are concerned about several global issues, which they are monitoring closely.

Federal Reserve Chair Jerome Powell emphasized during his MPR congressional testimony on February 11 and 12 that the “US economy is in a very good place.” The threat from the coronavirus is something to watch, he said, but too early to understand. Nevertheless, he affirmed that “there is no reason why the expansion can’t continue.”

Below, we review reasons that Fed officials are sanguine about the US economic outlook, followed by the concerns they are monitoring. Most of the issues discussed in the MPR have been around since the current expansion began. The two new exceptions are trade tensions, which started in 2018 but have recently diminished, and the coronavirus, which has been a global risk to health, economic growth, and stock markets only since the start of this year.

Fed II: In a Good Place. Powell first used “in a good place” in reference to inflation during his 9/26/18 press conference. In his 1/30/19 presser, he said, “The US economy is in a good place.” He used “in a good place” to describe the economy and Fed policy four times during his 3/20/19 presser. The four-word phrase appeared again at the following pressers: 5/1/19 (once), 6/19/19 (thrice), 7/31/19 (once), 9/18/19 (nope), 10/30/19 (thrice), and 12/11/19 (once). At his 1/29 presser this year, he said that “household debt is in a good place, a very good place.” In his latest congressional testimony, he upgraded his assessment of the US economy as being in a “very good place.”

We wish he would stop using that expression. Our contrary instincts come out every time he says it. Nevertheless, he is right: The US is currently in a very good place compared to China. Let’s review what’s so good in the good old USA according to the Fed:

(1) US manufacturing slump not severe. After increases in 2017 and 2018, manufacturing output declined in 2019. But do not be alarmed; the report dismissed the decline as too small to “initiate a major downturn for the economy.” The MPR observed that mild slowdowns are not atypical during business-cycle expansions; to signal a broad recession, manufacturing would need to be experiencing a severe downturn. Every recession since 1960 included some months when the 12-month change in industrial production was at least 7 ppts below trend. The recent US data are well above that threshold: 2019 growth averaged 2 ppts below trend (Fig. 1).

(2) Solid labor market gains. Overall, the Fed has been pleased with the pace of gains in the job market. The MPR noted the following supportive data: The average monthly pace of payroll gains in 2019 of 176,000 was slightly below the pace of 2018 but faster than required to allow for net new labor force entrants as the population grows. During December 2019, unemployment fell to the lowest level since 1969, 3.5%, down from 3.9% a year ago. It ticked up just slightly m/m during January to 3.6% (Fig. 2).

Labor force participation increased, including for prime-aged individuals. Wage gains remained moderate. Powell indicated he was pleased to see labor force participation picking up as a result of stronger labor market conditions forcing employers to hire and train less skilled employees (Fig. 3).

(3) Residential investment moving up. “Financing conditions for consumers remain supportive of growth in household spending,” the Fed reported, observing that housing starts and permits for new construction rose to the highest levels in more than 10 years (Fig. 4). Sales of new and existing homes also increased during 2019 despite home price appreciation, reflecting reduced mortgage interest rates.

(4) Consumer spending strong. Strong consumer spending last year was supported by the “relatively high level of aggregate household net worth” as both house prices and US equity prices increased.

(5) Growth for advanced economies stabilizing. Growth in several advanced foreign nations has shown tentative signs of “steadying.” Brexit risk has lessened, but the final resolution of the UK’s divorce from the EU remains to be settled. Economic growth in Japan has deteriorated, but that’s expected to be a transitory effect of the October consumption tax increase. Following the report, Japan’s Q4 GDP was released at an annualized rate of -6.3%, largely attributable to weak private consumption given the sales tax increase to 10% from 8% (Fig. 5). For the US, fewer Fed officials “judged the risks to the economic outlook to be tilted to the downside” in their projections made in December versus last June, observed the report.

(6) Trade policy progress made. Uncertainty around trade policy recently “diminished somewhat,” the report highlighted, reflecting progress in the US–China trade negotiations.

(7) Global monetary policy accommodative. The current stance of monetary policy and low level of interest rates remain supportive of global growth. “Amid weak economic activity and dormant inflation pressures, foreign central banks generally adopted a more accommodative policy stance,” according to the report. Long-term interest rates in many advanced economies remained low. Indeed, central bank balance sheets continue to grow, as we discussed yesterday. For example, China’s central bank has moved aggressively to combat the coronavirus on the economic front by injecting more liquidity into the credit markets.

(8) Financial stability solid. The Fed believes that the US financial system is “substantially more resilient than it was before the financial crisis,” primarily because leverage in the financial sector and total household debt have moderated.

(9) Fiscal policy boosting growth. Current fiscal policy is expected to continue to boost growth. The Tax Cuts and Jobs Act of 2017, which lowered personal and business income taxes, and the recent boost in federal purchases have added to growth, the report said—a point Powell reiterated in his testimony. Following the report, news broke that the Trump administration is planning another possible US fiscal stimulus package—including middle-class income and capital-gains-tax cuts—should Trump be reelected.

Fed III: When China Sneezes. The coronavirus has led to unprecedented quarantines throughout China’s Hubei province and several of the country’s major cities. In effect, China has been quarantined from the rest of the world, as international flights have been suspended until the virus stops spreading and goes into remission. As a result, supply chains that go through China are being disrupted. China’s overall GDP, along with consumer demand, could either stop growing or actually turn down as a result of the epidemic. All this was confirmed by Apple’s warning on Monday that it does not expect to meet its quarterly revenue forecast because of lower iPhone supply globally and lower Chinese demand as a result of the coronavirus outbreak.

Not surprisingly, therefore, the MPR includes the coronavirus on the Fed’s worry list. The report was released to the public on February 7, two weeks after the outbreak hit the headlines. Let’s review the Fed’s worry list:

(1) Weak pace of inflation. According to the Fed, low readings in the US inflation rate were attributed to possible transitory influences, specifically “idiosyncratic” declines in “specific categories such as apparel, used cars, banking services, and portfolio management services.” After briefly rising toward the Fed’s 2.0% inflation goal during 2018, the pace of inflation during 2019 dropped well below that target again. The 12-month change in the PCED (personal consumption expenditures deflator) for both the headline and the core rates were just 1.6% as of December 2019, below year-ago readings for both (Fig. 6). Global inflation also remains subdued. Powell expects US inflation to move closer to 2.0% over the next few months, according to his testimony.

(2) Declines in business investment. The report voiced concerns about the stalling of business investment in structures, equipment, and intangibles last year. Private nonresidential fixed investment in real GDP was flat y/y during Q4, the weakest growth rate since Q1-2016 (Fig. 7). That reflected trade policy uncertainty and weak global growth, according to the Fed’s report, among other factors (including the “suspension of deliveries of the Boeing 737 Max aircraft” and “the continued decline in drilling and mining structures investment”). Going forward, the Fed expects business investment to remain subdued.

(3) Weak productivity trend growth. Wage gains remained moderate despite solid job market improvement. The Fed attributed this to weak productivity growth, partly as a result of “the sharp pullback in capital investment … during the most recent recession” and the slow recovery that followed. “While it is uncertain whether productivity growth will continue to improve,” the Fed said, “a sustained pickup in productivity growth, as well as additional labor market strengthening, would support stronger gains in labor compensation.” Powell said in his testimony that boosting productivity “should remain a national priority.”

Following the report, data covering last year’s productivity growth was released showing a 1.7% gain (Fig. 8). As we see it now, GDP has been growing at a little over 2.0%, so we are getting more of our economic output from productivity, which bodes well for real wages and profit margins (Fig. 9). In other words, we may be able to cross this one off the Fed’s worry list soon.

(4) Weak emerging markets growth. Growth in many Latin American and Asian economies (e.g., China, Hong Kong, and India) has slowed markedly. Social and political unrest in Hong Kong and Latin America have resulted in severe economic disruptions. In India, the “ongoing credit crunch continues to weigh on activity.”

(5) China spillover potential. In China, GDP growth slowed further in 2019 against the backdrop of “increased tariffs on Chinese exports, global weakness in trade and manufacturing, and authorities’ deleveraging campaign that continued to exert a drag on the economy” (Fig. 10). “[S]ignificant distress in China could spill over to U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices,” the report stated.

(6) Coronavirus possible contagion. Coronavirus was mentioned eight times in the report, including “[M]ore recently, possible spillovers from the effects of the coronavirus in China have presented a new risk to the outlook” and “The recent emergence of the coronavirus … could lead to disruptions in China that spill over to the rest of the global economy.”

(7) Corporate debt & asset valuations elevated. “[A]sset valuations are elevated and have risen since July 2019, as investor risk appetite appears to have increased,” the report observed. Business debt remains elevated as well, whether viewed as a ratio of business assets or growth measures. In addition, that debt has gotten risker: The lowest investment-grade category (triple-B) represents about half of investment-grade-rated debt outstanding; that’s near an all-time high. Economic deterioration could lead to a liquidity crunch in the credit markets.

(8) Uncertainty in setting monetary policy. The report dedicated a box to discussing the Fed’s concern about the future effectiveness of its current approach to conducting monetary policy. The US economy has “changed in ways that matter for monetary policy. For example, the neutral level of the policy interest rate appears to have fallen in the United States and abroad, increasing the risk that the effective lower bound on interest rates will constrain central banks from reducing their policy interest rates enough to effectively support economic activity during downturns.”

With Immunity to Coronavirus, US Stocks Melt Up with Impunity

I discussed the possibility of a meltup in stock prices in my 12/18/19 Morning Briefing titled “2020 Vision.” I wrote: “Another risk is that investors could conclude that there is nothing to fear but fear itself. That could lead to a meltup. When the S&P 500 rose to our 3100 target for this year on 11/15, we started to consider the possibility of a meltup scenario involving an advance to our 3500 year-end 2020 target well ahead of schedule in early 2020. We may be experiencing that meltup now given that the S&P 500 is getting close to 3200 already!”

I reiterated this view in my first commentary of 2020, dated 1/6 and titled “Nothing to Fear But Nothing to Fear (and Iran).” As it turned out, the crisis with Iran didn’t last long enough to merit adding it to our Table of S&P 500 Panic Attacks Since 2009. However, we did add the coronavirus outbreak as #66 on our list with a 1/24 date, when the outbreak news first hit the tape. So far, it has turned out to be among the very short and minor selloffs, as the S&P 500 dropped only 3.0% from 1/23 through 1/31 (Fig. 1). The index is up 4.6% ytd, closing at a new record high of 3379.45 on Wednesday. A gain of just 3.6% would put it at our 3500 target for year-end!

That’s quite a remarkable development. Recall that there were a couple of panic attacks in 2018 and again in 2019 triggered by Trump’s escalating trade war with China (Fig. 2 and Fig. 3). One of the big worries was that the trade frictions would disrupt supply chains and force companies to spend money to move them out of China. It seems to me that the coronavirus outbreak in China poses a more immediate and greater threat to supply chains. Yet here we are at record highs in the S&P 500, DJIA, and Nasdaq.

There was also a minor panic attack when the yield curve inverted last summer (Fig. 4). But the Fed reversed that problem by cutting the federal funds rate for a second and then a third time last year on 9/18 and 10/30. The yield curve since has flattened again and may be about to invert again too. Yet this story is getting no play in the financial press as a pressing concern about an imminent recession the way it did last year.

The markets must figure that the coronavirus outbreak will be contained soon and go into remission, as did SARS, MERS, and Ebola. If that doesn’t happen, then there will be a vaccine that will make us feel better. It won’t be a miracle cure coming from a drug company. Rather, it will be injections of more liquidity into the global financial markets by the major central banks.

On Tuesday, Fed Chair Jerome Powell implied that the Fed is on standby to do just that. In his testimony on monetary policy to Congress, he said, “Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

Meanwhile, I continue to monitor the weekly fundamental indicators for the S&P 500 for signs of the viral infection:

(1) Forward revenues & earnings. It’s too soon to tell whether the virus outbreak is starting to weigh on S&P 500 revenues and earnings. S&P 500 forward revenues remained at a record high during the 1/30 week. Forward earnings edged down 0.3% during the 2/6 week from its $179.01 record a week earlier (Fig. 5). The forward profit margin remained at 12.0% during the 1/30 week.

(2) Q1-Q4 earnings. Nevertheless, industry analysts may have just started to cut their Q1-Q3 earnings estimates during the 2/6 week to reflect the possible negative consequences of the virus on the companies they follow (Fig. 6). They seem to be doing their best to offset those cuts by boosting their Q4 estimates, by which time the virus problem should have passed, in their collective estimation.