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Markets Shrug Off Coronavirus Uncertainties

February 17, 2020
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Monday Morning QB - Market Observations:

  • Stock Markets around the Globe Shrug Off More Bad News Out of China
  • Chinese Officials Announce a Jump in Coronavirus Infections
  • S&P 500 Index Climbs Despite Mixed Economic Results…Focused More on the Positive News
  • Central Bank of China Likely to Add Liquidity, if Needed, to Help Provide Calm
  • Federal Reserve Chairman Powell’s Capitol Hill Visit Reassures Markets
  • Federal Reserve Liquidity (Easy Money) Has Been a Cornerstone of the 11-Year Bull Market (a Formula NOT Lost on China)

Monday Morning QB - Market Performance:

U.S. stocks ended the week with gains despite concerns around a sharp increase in reported coronavirus cases. The gains carried the large-cap indexes and the NASDAQ Composite to new record highs, with the latter receiving an extra boost from the continued strong performance of technology stocks.

The Dow Jones Industrial Average added 295 points, or 1.0%, finishing the week at 29,398, its second week of gains. The technology-heavy NASDAQ followed last week’s surge with an additional 2.2% gain to 9,731.

By market cap, the large-cap S&P 500 added 1.6%, while the mid-cap S&P 400 and small-cap Russell 2000 indexes gained 2.3% and 1.9%, respectively.

Why the Coronavirus Has Potential to Slow Down Markets

As many of you already know, the coronavirus has shut down an area bigger than New York City in China. It is hard to imagine New York City turning into a ghost town, as seen in the images of Wuhan.

Try to imagine the effect on commerce. Factories shutting down, no one to spend money because everyone is inside, in addition to disrupted supply chains.

Stock markets around the world should be selling off, shouldn’t they?

Why Are Markets so Sanguine?

This disruption is in the second largest global economy! Shouldn't we be concerned?

The markets did drop 3% between Jan. 23 and Jan. 31 as coronavirus cases found their way inside our borders. A week or so later, however, the market had managed a rebound and earned back all that was lost.

Investors have pretty much fallen into two categories.

The first views the results of past virus outbreaks and quotes the research showing the long-term impacts of past viruses are negligible, especially if the virus can be contained. This group believes that the virus is mainly a China problem.

The second group are not convinced that this epidemic is under control and believe the Chinese officials are underreporting the infected to stave off panic.

There will be consequences in the data going forward for hopefully only a quarter but possibly longer. However, the market appears to be betting on the shorter disruptions to commerce for now.

The more optimistic view continues to own the day. Evidenced by the past two weeks of stock market gains.

The Number of Infected in China Gets a Redo

The big news of last week was the new stats showing many more infected Chinese than currently thought.

Chinese authorities announced 5,090 new cases to the daily tally. The higher total changed all projections to a worsening scenario.

The new numbers show more than 63,000 Chinese infected with the coronavirus. The death toll as of Friday confirmed there are at least 1,380 deaths.

The increase in the numbers infected seemed to come from a change in how the Chinese medical community is now diagnosing patients rather than an actual jump in truly infected people.

Another notch for the “it's not that bad” investment community.

How Will China's Response Affect U.S. Markets?

Will the Chinese Continue Corrective Measures to Stimulate Their Flagging Economy?

As discussed in previous Monday Morning QBs, the People’s Bank of China deployed 1.7 trillion yuan in open-market operations in hopes of stimulating the Chinese economy.

The expectation is further continuing fiscal support as needed.

We should all recognize in the U.S. how far a loose monetary policy can move stock markets for years, as evidenced by the length of our current bull market. Will China follow suit?

Federal Reserve policy has been a key driver of stock market prices in the U.S. for all 11 years of our current bull market. It was open-market operations, the Fed’s easy money policies, that seemed to put a floor on stock prices during any meaningful attempt at a significant pull back. 

Another important point to make is the lack of impact on U.S. companies from events in China.

According to FactSet, S&P 500 companies only generate 5.8% of their sales in China compared to 62% of sales in the U.S.

The concern for U.S. companies, as shown by the data from FactSet, is not from the demand side but the supply side.

And the Next Step?

As earnings season winds down, political headlines and the current news cycle will likely have a more pronounced effect on stock prices. Certainly, one can argue a prudent investor should take some risk out of their portfolio until there is an all-clear sign concerning the coronavirus.

The markets appear to be betting on a one-quarter blip on the radar rather than a long-term negative effect on global stock prices.

Let’s hope optimism wins out in the end!

Until then, we will be happy to be in the prudent investor camp. Not risk-off but a little less risk for now; cautiously optimistic, if you will.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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