Making sense of a moving target: Scenarios for COVID-19 impact

by: , Director and Portfolio Manager, New York Life Investment Management; Multi-Asset Solutions team, Multi-Asset Solutions team, New York Life Investments

The situation on coronavirus (COVID-19) has deteriorated meaningfully since early February, as reports of new infections globalized. The significant, though uncertain, economic implications of a severe outbreak triggered a sell-off in global equity markets, resulting in the fastest ever 10% correction in the S&P 500 Index and U.S 10-year treasury yields falling below 1% for the first time ever.

Policymakers’ response so far has suggested that they are closely monitoring investors’ concern. On March 3, the U.S. Federal Reserve cut its policy rate by 0.50%, a surprise move meant to reassure financial markets and calm potential swings in financial conditions.

Still, economic data in the coming months will demonstrate significant disruptions stemming from covid-19’s spread. And analysts are grappling with scenarios for that impact on the global economy and markets. So far, the International Monetary Fund (IMF) has cut its global growth forecast by 0.1% and the Organization for Economic Co-Operation and Development (OECD) cut its global gross domestic product (GDP) forecast by half a percentage point to 2.4% for 2020.

Though the situation is highly uncertain, the economic impacts could be much more significant.

Case study: Spanish flu of 1918

No historical pandemic exactly matches the characteristics of covid-19, which appears to be highly transmissible, dangerous, and easily spread to other regions via modern travel. But in terms of ease of spread and mortality rates, the Spanish flu of 1918 has some similarities, when 500 million people were affected globally, and the death rate was around 2.5%. According to a 2006 report1 on the Consequence of Pandemic, U.S. GDP dropped 11% in 1919, but with the ongoing World War I at the same time, it is hard to determine the contribution of Spanish Flu to that downturn.

Past pandemics’ economic impact

Sources: Mckibbin, Warwick & Anu, Cama & Sidorenko, Alexandra & Anu, Nceph. 2006. Global Macroeconomic Consequences of Pandemic Influenza.

Of course, there are some major differences between the Spanish flu and more recent outbreaks. For example, medical prevention and response capabilities have improved, but global travel has increased the ease of spread. In addition, males aged 18 to 40 were the hardest hit by the Spanish flu, which is not the case this time. These factors make it harder to draw reasonable inferences from the period.

To put a finer point on this comparison, we look at some of the more recent research reports on what could be the potential impact from a global moderate to severe pandemic.

Economic impact of severe pandemic

A 2008 report2 from the World Bank estimates that a severe pandemic, sagging tourism, transportation, retail sales, and productivity, coupled with worker absenteeism, could reduce global GDP by 4.8%. In 2006, Congressional Budget Office (CBO)3 estimated an impact of -4.3% to real U.S. GDP from a severe pandemic scenario. A similar 2006 analysis on the “Global Macroeconomic Consequences of Pandemic Influenza”1 estimates a worst-case GDP shock of around -5.5% to the U.S. economy. Another analysis from the Bank of Montreal (BMO)4 suggested a drop of 6% in global GDP from prevailing growth rates.

Estimate for economic impact from past studies on the U.S. or world GDP from a pandemic

According to the studies quoted above, in the worst-case scenario, we may be looking at a fall of 4.0% – 6.0% in GDP from trend growth, in the case of a severe pandemic. This is similar to the loss in economic activity from a typical recession, using the six most recent recessions as a guide. The damage from a mild or moderate pandemic, according to these studies, would be less than half of a typical recession.

Market implications

The experience for equity market investors can vary as widely as viruses do. One reason for this is that markets sometimes overreact in the short term as uncertainty around health and economic impacts prompt fear.

Though the shock to GDP in the case of a severe pandemic is similar to that of a recession, it will likely be short-lived in comparison to past recessions, therefore, diminishing the overall impact. Also, past recessions followed an oil shock or Fed tightening, which is not the case this time. However, with trailing price-to earnings ratio for U.S. equities above 20, stretched valuations can make equities more vulnerable, and can result in a larger than usual drawdown. For example, in 2000-2001, when the S&P 500 Index was trading at a price to earnings ratio of over 28 at market peak, the index suffered a drawdown of 46.3%, even though the hit to the GDP was only -3.4%.

What does a recession mean for the markets?

Maximum equity drawdown

Sources: Bloomberg, MacroTrends, 2/29/20.

The combination of high valuations and the uncertain spread of the virus means that, for most investors, it is highly advisable to remain cautious in your portfolio positioning.

As the impact to new regions becomes clear, we would expect risk assets to continue to be negatively impacted. We are reducing our equity exposure further – selling on strength – until the storm has passed. And we are closely monitoring for a peak in case volume, decelerating geographic spread, or material developments in antiviral drugs to determine when the virus’ worst impact is over.


Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.

Trailing price-to-earnings (P/E) is a relative valuation multiple that is based on the last 12 months of actual earnings. It is calculated by taking the current stock price and dividing it by the trailing earnings per share (EPS) for the past 12 months.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company.


Amit Soni, CFA

Director and Portfolio Manager, New York Life Investment Management

Amit Soni is a Director and Portfolio Manager in the Multi Asset Solutions (MAS) team at New York Life Investment Management. He focuses on quantitative and macro-economic investment research and portfolio management for the asset allocation

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Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solutions (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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