The Wuhan coronavirus is mysterious in that we hear new things about it daily, if not every few hours. The latest is that it has a long incubation period (the time between infection and the appearance of symptoms) and it is communicable before symptoms emerge. So, people who are infected have no idea that they are. Sure, people could barricade themselves in their home if symptoms occur so they don’t spread the virus, but they likely did so already. That’s what makes it so difficult to contain.
Past viruses that spread from animal to human, then human to human, were SARS, MERS, bird flu, Swine flu, and Zika. New viruses are difficult to treat because humans haven’t develop antibodies yet. Plus, new viruses mutate rapidly, becoming more efficient at replicating and infecting to new hosts.
Johnson & Johnson’s chief scientist was interviewed about this virus on CNBC this morning. He thinks a vaccine for this virus could be developed within a year. Too late for too many people, but that’s why containment is our best strategy while we wait for a vaccine.
https://www.cnbc.com/quotes/?symbol=jnj&qsearchterm=jnj
But my point with this investor alert is how it affects the global economy and markets.
In 2003, SARS caused a mild, short lived recession in much of South East Asia and shaved about 1% off of China’s GDP. Have the Chinese learned from SARS? This time it seems Chinese authorities were slow to get in gear but have since ramped up their containment measures with the biggest quarantine in history. About 50 million people in and around ground zero, a livestock market that also trades wild animals, are quarantined. The total global dollar amount of lost goods and services due too SARS is generally accepted to be 40 Billion Dollars. Keep in mind that no one in the U.S. died from SARS. It’s worth pointing out that it went away pretty quickly. The World Health Organization declared SARS to be contained in July of 2003. In other words, it was a fairly brief event.
The breakout of the new virus comes at a tough time for the Chinese economy. China’s economy has been on somewhat shaky ground for a while now and the current trade war has made things worse. China is a bigger part of the global economy today. Its economy has a major impact on Southeast Asia; so we are talking about a substantial portion of the global economy that is now impacted. Regardless, it is way too early to declare an economic slowdown in any region due to the Wuhan coronavirus, as of now. Industrial China was pretty much shutdown due to the Chinese New Year. But when the festivities end, we’ll start to see how many people don’t show up for work; be it by choice or by government order.
Reports of Starbucks and McDonald's closing thousands of stores in and around affected areas in China adds to worries of the virus’s economic impact in China and on corporate earnings of American companies generally. If we see corporate actions like these happen in other countries, that would add to the concern about reduced corporate earnings.
This virus would have to spread more and for a longer amount of time before it hits the global economy. But investors in certain sectors of stocks are not waiting for evidence.
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Stocks that service large amounts of people in person are the first to feel the impact; airline carries, theme parks, cruise lines, and shopping malls.
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Global stock markets are down in part due to the above, in part due to investors selling index funds, and some due to algorithms.
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The selloff has been visceral because stocks have been up for the last several months and was due for an eventual pullback.
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The nature of markets is that pullbacks are caused by unknown factors, black swan events, and we are having one now.
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If this scare passes in a few weeks, I would expect stocks to bounce back fairly quickly.
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Historically, market reactions from past virus outbreaks, like SARS, have been short lived and most of the time, global stock markets traded higher 6 months and 12 months after the initial breakout.
According to Dow Jones* Market Data, the
S&P 500** posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76% (see table below):
