Here’s why the stock market may be overreacting to the coronavirus threat

Peter Cardillo of Spartan Capital Securities on coronavirus taking a toll on the markets & more
January 27, 2020
Oil prices had weakened even before coronavirus scare: Peter Cardillo, Spartan Capital
January 27, 2020

Here’s why the stock market may be overreacting to the coronavirus threat

  • Stocks opened lower on Monday, with the Dow Jones Industrial Average down more than 500 points, or 1.8%, after confirmed cases of the coronavirus rose over the weekend.
  • Markets also slumped in early 2003 amid an outbreak of severe acute respiratory syndrome, or SARS, but many major indexes finished the year strong.
  •  “People are under-appreciating how bad this is going to be in China, and over-appreciating how bad it is going to be in the U.S.,” said Chris Meekins, healthcare policy analyst at Raymond James.

Chinese officials said that more than 2,800 people in the country have been diagnosed with the virus, and that 81 have died. China also said the virus is contagious during its incubation period, which would make it harder to prevent the disease from spreading. By comparison, SARS could not be spread by people who weren’t yet showing symptoms, Meekins said.

Market overdue for pullback

The current outbreak comes at a time when the market has been on a steady climb for the last several months, powered mainly by large tech stocks. The elevated prices of stocks may have made some investors more willing to sell on bad news such as this.

“Market internals were already suggesting skepticism on a big growth reacceleration prior to the outbreak of the Coronavirus,” Morgan Stanley said in a note to clients.

Peter Cardillo, chief market economist at Spartan Capital Securities, said the market is overreacting to the virus.

“The market was looking for some news that would dampen the recent enthusiasm. This news of the virus creates a perfect storm and it might make investors ignore the Fed’s accommodative stance, the macro news and the good earnings that so far have been coming out,” Cardillo said.

The SARS outbreak contributed to a slump in global markets in early 2003, but stocks recovered once the outbreak was contained. The S&P 500 dropped roughly 10% from the start of the year until mid-March, but finished up more than 26% for the whole year.

To be sure, the market conditions in 2003 were different than in 2019, with stocks still at a lower level following the tech bubble and not coming off a decade-long bull market. The SARS outbreak was also accompanied by another major international factor for the markets in 2003, as the U.S. invaded Iraq in March.

The longer term effect on markets from the virus could be determined by how much it weakens economic growth in China. The response by China has been much stronger during this outbreak than for SARS, but the impact will still be significant for the country, Meekins said.

“The shutdown of these cities, the 50-million-plus people basically sequestered, is not a one or two day event. It will be a weeks-long event, if not a month,” Meekins said. “Which means all the economic impact from those areas is going to be dramatically lower, if not basically cease.”

Oil prices fell to their lowest level since October on Monday, reflecting concerns about global growth following the coronavirus outbreak. Global oil demand also took a hit from during SARS, but that only lasted for a quarter and not the entire year, according a note to clients from Raymond James.