Save for a couple of hiccups, U.S. stocks have spent the vast majority of the last decade steadily marching higher. But you’d be forgiven for having questioned the strength of this rally at some point.
In the last few years alone, investors have sounded the alarm over a number of headlines that were thought to be warning signs of an impending recession or market crash. To name a few: rising interest rates, slower manufacturing, a nuclear war, trade war, and multiple inverted yield curves.
Yet, in spite of those fears, U.S. stocks have consistently outperformed most other asset classes. This rally in the face of oftentimes significant headwinds has been characterized as the market climbing “a wall of worry.”
The latest of these worries is the Coronavirus. If the past few weeks have shown us anything, it’s that the market seems content to keep marching on.
An Abbreviated Timeline Of Events:
December 31: Chinese authorities first report to the World Health Organization that a type of pneumonia had been spreading since December 12 in Wuhan, a coastal city of 11 million people. Confirmed cases: 40; Confirmed deaths: 0
January 11: China announces the first confirmed death from the virus, at this point confirmed to be a different bacterial strain from SARS or MERS. Confirmed cases: 41; Confirmed deaths: 1
January 21: The CDC confirms the first case of Coronavirus in the U.S. Confirmed cases: 547; Confirmed deaths: 17.
January 30: The WHO declares a global health emergency as new countries continue to report confirmed cases of the virus. Confirmed cases: almost 8,000; Confirmed deaths: 170
February 9: The outbreak surpasses the 2002-2003 SARS epidemic. Confirmed cases: over 37,000; Confirmed deaths: 811
According to data compiled by a Coronavirus tracker set up by researchers at Johns Hopkins, there are 175 confirmed cases of Coronavirus outside of China, though only one of those has resulted in a death. The worldwide death toll as of February 12 is 1,115.
The Overall Market Seems Unconcerned…
The outbreak has roiled Chinese markets, with the Shanghai Composite Index down 5% this year while the Hong Kong Hang Seng Index is down 1.5%.
The same can’t be said outside of China. Japan’s Nikkei is up 0.86% on the year. The FTSE 100 in London is essentially flat, down 0.10%.
In the U.S., the S&P 500 is up 4% with most of those gains coming in February. That strength may be the best “wall of worry” example in recent memory, as the market is giving a loud-and-clear signal that, at least in the U.S., the Coronavirus is a temporary headwind.
…But Individual Stocks Are Volatile
However, that doesn’t mean that the effects of the virus haven’t been felt.
Investors have been selling U.S. companies with high exposure to China and global travel. Carnival Cruise Lines (down 15%), Royal Caribbean (down 15%), and Norweigan Cruise Lines (down 10%) have all been hit hard this year. And the closure of Macau has also impacted casino stocks like Wynn Resorts (down 5%) and MGM Resorts (down 1.6%).
Other travel stocks like Marriott (down 2.8%) and TripAdvisor (down 1.8%) have been relatively weak to the rest of S&P 500.
The effects haven’t been totally negative for stocks with exposure to the virus. Many micro and small-cap names have been especially volatile to announcements related to the treatment or containment of the disease. This includes biotech companies Co-Diagnostics (CODX)—which is up 264% this year—Cleveland BioLabs (CBLI)—up 263%—and medical apparel companies like Alpha Pro Tech (APT)—up 52%—and Lakeland Industries (LAKE)—up 14%.
What They’ve Said
Though many statements have been made as to the long-term effect of the Coronavirus on business, the general consensus seems to be that it’s too soon to tell.
A number of top CEO’s have addressed the virus on their earnings calls, but companies have thus far been hesitant to provide concrete forecasts on the impact it could have on their businesses. Everybody from Apple to Disney to Starbucks has announced closures until the virus gets under control. But without forward-looking statements on the financial impact to lean on, investors have largely ignored them.
Fed Chair Jerome Powell told Congress that there will “very likely” be an impact on the U.S. economy, though he was unwilling to provide a more detailed assessment other than to say that they believe the U.S. economy is still in a good place. White House Trade Advisor Peter Navarro was also uncertain as to the virus’ effect.
The most notable economic forecasts thus far have come from Moody’s Analytics and Barclays, both of whom estimate the virus will lower global GDP by 0.3% this year.
For now, there seems to be too many questions about the epidemiology of the virus and too few answers. The bull case remains that any economic effects of the virus will be short-lived. And to the bears, the market is either ignorant of the virus, arrogant, or both.
All data and figures in this article are as of February 12, 2020. The author is long Apple, Starbucks, Disney, Royal Caribbean, Norwegian Cruise Lines, Carnival, MGM, Wynn, and TripAdvisor in his 401(k).
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