How Swine Flu Could Affect the Economy

by George Leong, B. Comm.

If the current economic and earnings concerns were not enough, we now are faced with the threat of a global flu pandemic that could wipe out about $3.0 trillion, or five percent, of global GDP, according to the World Bank.

The threat of a potential global outbreak of the Mexican-originated swine flu is continuing to exert downward pressure on stock futures this morning. The World Health Organization suggests it is too late to contain the virus. Now there is increased concern that an outbreak will hurt economies not only in Mexico, but also in other major global markets.

Given the existing concerns in the market, this is the last thing investors want to hear. The threat, while still premature and likely to be contained, is nonetheless a threat, as there is a chance it could spread globally. The next few weeks will give us a better indication of whether containment will work.

The stock markets continue to roll along in a sideways pattern. There have been key upside breaks, with the NASDAQ at 1,650 and Russell 2000 at 475, before a retrenchment. Failing to hold above the key levels could see the major indices trade in a consolidation pattern.

The first-quarter earnings have been weak and expected. Guidance has been predominately fuzzy and cautious going forward. We have really yet to get positive signs on the economy from companies and this is not good, given that businesses have a keen sense of the economy. The Federal Reserve meets Wednesday to discuss the U.S. economy and interest rates. I do not expect a shift in the current interest rate policy. There have been some positive signs, but not enough to say that the recession will be over in 2009, despite what the Fed is saying. Unless we see a series of positive economic reports, the recession could linger into 2010. In fact, the global economies also need to improve for the U.S. to rebound. Domestic demand will not be enough.

The CRB Spot Index, a measure of 22 commodities, appears to have bottomed at 200 and has its eye on the 230 level, although it is stuck at the 220 level. The June Gold has fallen back below $900.00 on some buying in stocks, but we could se a rebound back above $900.00 given the swine flu. Oil is holding just below $50.00, with a slightly negative bias due to the global economic contraction. The bottom in oil appears set in the $40.00 range.

Keep an eye on the chart of the CRB, as there may be a bearish double top in the works. The CRB is indicating that the economy may be setting up for a turnaround, as the basket of key commodities is showing some signs of turning up. The peak for the CRB was June 1, 2008, when the index traded at 467.60 prior to the subsequent slide. The low was at the 180 level in late 2001. The CRB will trend higher when global economies show signs of reversing from the recession.

In the near term, I continue to expect intraday volatility given the flow of economic and earnings to come. There is still a chance this may be a “W” pattern recovery and not a “V” recovery. If this is the case, stay vigilant, as there will be some buying opportunities surfacing.