What The Stock Market May Be Missing About The Coronavirus -
Leaving aside the heartbreak experienced by relatives and friends of those with the illness, as well as the many deaths, this coldblooded analysis rests on several assumptions that may turn out to be unsound—notably, the big risk that this virus could follow a different pattern than the 2003 outbreak of severe acute respiratory syndrome, or SARS, the financial effects of which are being widely used as a model. The biggest China exchange-traded fund, iShares MSCI China ETF, is down 11%; the U.S. Airline sector is off 7%; and Brent crude oil, the global benchmark for the main transport fuel, is down 13%. Stocks in China-dependent Taiwan and South Korea have lost 6% and 9%, respectively, in dollar terms, while the U.S. Benchmark S&P 500 is down only 3%.
Investors care much more about the long-term prospects for earnings than a short-term hit to sales; there are going to be lots of profit warnings blaming the infection. But, investors assume, things will rapidly return to normal. If people can pass on the virus before they show symptoms, or if it turns out to be easier to catch than first thought, it may spread rapidly outside China. Second, investors are assuming that the wider population outside China remains calm and that preventive action by governments and companies isn’t terribly disruptive. If confidence crumbles, it will be doubly bad. The S&P 500 was the most highly valued since 2002 just before the outbreak, with investors verging on exuberant, so any loss of faith could hit prices hard.
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