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Market’s Reaction to Coronavirus Isn’t the Same as SARS

Updated: Mar 25, 2020

Coronavirus is different from SARS in that it appears to be more contagious but has a lower mortality rate. The reaction from governments and businesses to contain the disease therefore have a much greater impact on the economy than the disease itself, according to Michael Shaoul, CEO and portfolio manager of Marketfield Asset management.

Many factories are slated to reopen Monday, but it’s uncertain whether that will happen given the continuously rising number of infected cases. When China will let employees get back to work will be a key variable, so is the lockdown period of cities in Hubei province and travel restrictions from many other countries. “The biggest economic risk at this point is fear of a Chinese market collapse and a drop in Chinese productivity and supply chain to the rest of the world,” writes Shaoul.

For now, investors appear to be optimistic that the economic disruption could come to an end soon. The Chinese government seems willing to do whatever is needed to cushion the outbreak’s shocks to the Chinese economy and financial markets. The People’s Bank of China has injected 1.7 trillion yuan of liquidity into the market, lowered banks’ reserve repo rates and instructed them not to call in loans for companies based in the virus-stricken Hubei province. More measures will be on the way, the central bank said on Friday.

That looks a lot like what happened after the 9/11 terrorist attack in 2001, writes Shaoul. Economic activities and investor confidence was abruptly disrupted following the event. The New York Stock Exchange was shut down for nearly a week and the Federal Reserve injected a substantial amount of liquidity into the market to help avert a financial crisis. How did the stock market run at that time? The S&P 500 plunged 11.6% in 10 days, but recovered all the losses within a month.

The coronavirus outbreak also came at a time when the U.S. and global economy was recovering from its recent slowdown. A combination of dovish monetary policies, robust earnings, and stronger-than-expected economic data has helped U.S. stocks weather the storm despite considerable uncertainty from the epidemic.

Still, if the economic disruption in China continues into late February or March, the global economy might start to see more spillover from the distress. Expect more volatilities to come.

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