Coronavirus tests market's faith in global economy

Investors struggle to determine whether outbreak could upend bets on recovery.

  • By Akane Otani,
  • The Wall Street Journal
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Investors who began the year feeling largely sanguine about the stock market are struggling to make sense of whether a growing coronavirus outbreak could upend their bets on a global economic recovery.

Just days ago, global stocks looked poised to close out January on a strong note. Benchmark indexes from the S&P 500 (.SPX) to the Stoxx Europe 600 to India’s S&P BSE Sensex climbed to records. Investors projected that, with issues including the U.S. and China’s trade war and central-bank rate increases in the rearview mirror, the global economy would likely be able to stage a modest rebound in 2020.

Now that view is being tested. The viral outbreak that originated in Wuhan, China, has infected thousands and spread to the U.S., Japan, South Korea and other countries. The disease threatens to hamper an already-slowing Chinese economy, in turn potentially jeopardizing the global recovery that many investors had counted on to materialize this year.

Anxiety over the outbreak hit financial markets around the world Monday, sending stocks from Japan to Germany to the U.S. to their worst days in months.

“We always say that, barring an exogenous event, things look fine,” said Michael Farr, president and chief executive of investment-management firm Farr, Miller & Washington. “I don’t think markets anticipated how contagious this disease has proven to be and how quickly it’s spreading.”

Over the past several months, Mr. Farr said his firm has been gradually selling some of its riskier investments, reasoning that the stock market had already managed to run up well past what most had expected in 2019.

“It really has yet to be seen whether this [downturn] will gain traction or not,” Mr. Farr said. “But it certainly seems like the ingredients for a further decline are coming together.”

Experts caution that it is still too early to understand how big an economic impact the virus will have. So far, health officials say the Wuhan virus appears to be less severe than prior strains, such as the SARS coronavirus.

Markets have also been resilient in the face of prior outbreaks.

Charles Schwab analysts found the MSCI World Index (.MIWO00000PUS) declined 5.5% in the month after January 2016, when the Zika virus spread to several countries, but returned 2.9% over the course of six months. In their analysis of 13 outbreaks since 1981, analysts at the firm found the index returned an average of 0.8% over a one-month period following an outbreak and 7.1% over a six-month period.

Morningstar analysts came to a similar conclusion, finding that, among the companies they covered, none suffered a long-term effect from the 2003 SARS outbreak.

In other words, even when stocks have taken a short-term hit from disease-related worries, they have tended to bounce back in the following months. That is because in recent decades it has been rare, if not unheard of, for a contagious disease to bring consumer spending to a halt around the world.

Nevertheless, the timing of this year’s outbreak is in some ways more worrisome than that of prior cases.

Data earlier in the month showed China’s economy grew 6.1% in 2019. While that increase was within the government’s target range, it marked the slowest pace of expansion for the world’s second-largest economy in nearly three decades. Should the coronavirus outbreak fail to stabilize by March, first-quarter growth in China could slow to below 6%, Société Générale economists said in a report.

Making matters worse, the latest outbreak is spreading in the midst of the Lunar New Year holiday, when millions of Chinese citizens typically travel to visit their families. And China’s economy is more interconnected to the global economy than it was when the SARS outbreak occurred in 2003, meaning a slowdown there could have widespread ramifications.

Even just days into the deepening crisis, markets outside China have been hit by volatility.

Copper prices fell 3.3% on Monday, logging their eighth straight day of declines and their biggest one-day loss since August. Prices for the industrial metal tend to pick up when investors are more optimistic about the prospects for economic growth.

Shares of airlines and casino operators such as Wynn Resorts Ltd. (WYNN), Las Vegas Sands Corp. (LVS) and American Airlines Group Inc. (AAL) slid, reflecting investors’ anxieties about a potential pullback in travel-related spending.

And in the U.S., the S&P 500 ended Monday down 1.6%, marking its worst session since October.

Some analysts believe markets may still have further to fall before they bottom out.

Morgan Stanley analysts predict the S&P 500 could drop as much as 5% before the current stretch of declines is over. That assessment is based on the view that stock prices had already run up past what the economic data justified, making them appear vulnerable to a drawdown even before the coronavirus outbreak began.

Ultimately, though, money managers say they have more questions than answers at this point.

During the SARS outbreak in 2003, “the hit to economic growth was measurable, albeit short-lived,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management, in emailed comments.

The extent to which markets slide this time around will depend on “the length, depth and breadth of the economic impact” of the outbreak, Ms. Nixon said, adding that she would be carefully monitoring news reports in the coming days.

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