From SARS in 2002 to the Avian Flu in 2006, infectious diseases have been known to cause corrections in the stock market. While Wall Street’s reaction to such outbreaks is often short-lived, there are some fluctuations we can expect as the Coronavirus spreads.
It is important to remember that the movement in the stock market is often impossible to isolate to one incident. While the Coronavirus may have an impact, there are also other market conditions that should be considered when evaluating the peaks and corrections.
Typically, the area where the outbreak originated, in this case Wuhan City, China, is where the stocks and companies will be the most heavily affected. With this outbreak, China is much more prepared and taking quicker action, compared to SARS in 2003, by quarantining the city early on. While this prevents the spread of the virus, it also affects the economy of the heavily populated city.
Markets react to uncertainty, thus explaining the correction during these time periods. Investors will often want to wait for more clarity on how severe and disruptive the outbreak will be. Any rise in uncertainty will have investors moving away from risky equities and towards safer investments like bonds.
For now, Chinese stocks and companies are going to be the most heavily affected. Companies that will take the biggest hit are those in tourism and consumer-related sectors. With cities closed down, hotel chains, airlines, nightlife and restaurants will obviously see a decline in customers particularly tourists, a vital component to their economy. Additionally, luxury retailers will see a decline in traffic, thus hurting high-end retail companies.
Discretionary consumers often turn to other options during outbreaks to avoid being at risk of contagion. Rather than leave the house for goods, they may order online from sites like Alibaba or JD.com. While this may help the already booming e-commerce businesses, it does risk smaller, local business livelihood.
Risk velocity, the pace at which major risks and events can affect asset prices, does play a role in how the Coronavirus crisis may be handled differently from previous ones. Risk velocity is much more elevated compared to ten years prior. This is due to three main factors: a social media-driven news cycle, the interconnectedness of global supply chains and a pricey stock market.
It is important for investors to focus on the long term for their investments. Prior epidemics have had impacts on the economy, but Wall Street’s reactions were transient. Due to China’s authorities and global quick response, the market impact can be managed.
Surprisingly, now may be a good time for investors to look for stocks that have taken a hit and purchase bargains while their price per share is low. Stocks will likely rise again as the crisis is handled and stabilized giving long-term investors an advantage.
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