- The stock market took a hit when news of the coronavirus first spread. But now it’s right back up again.
- Today, Alexander Green’s market analysis reveals why investors are choosing to look beyond the negative effects of the outbreak.
On January 30, I wrote a column called “How to Play the Novel Coronavirus.”
In that piece, I pointed out that the virus was spreading rapidly and had already crippled China’s land, rail and air transport.
I noted that its spread would hurt retail sales, curtail tourism, diminish global GDP growth and disrupt the intricate cross-border supply lines of thousands of multinational corporations.
Yet I implored readers not to fall prey to media hysteria and run to cash.
Those who listened already have much to celebrate. The Dow has since tacked on more than 1,400 points.
Percentage gains in the Nasdaq and S&P 500 have been even larger.
This is not to suggest that the worst is behind us. The virus is far from peaking, and the contagion is likely to spread in many countries, including the U.S.
Does the big bounce in stocks mean investors have turned a blind eye to this reality?
Not at all. The market isn’t ignoring the negative impact of the coronavirus.
It is looking beyond it. And so should you.
Don’t get me wrong. No one knows when the virus will peak, how far it will spread, how many people will contract it (or die) or how much it will shave off global GDP.
Everyone – including (or especially) the “experts” – making predictions on these subjects is simply blowing hot air.
There is too much we don’t know about the novel coronavirus to have any confidence in their assessments.
But understand this: The stock market is a relentless discounting mechanism.
All public information – about the economy, interest rates, inflation, commodity prices, currency values and yes even the spread of the virus – is immediately reflected in share prices.
If the disease spreads more rapidly or becomes more deadly than expected, that will negatively impact economic growth, retail sales and corporate earnings.
That means stocks would tumble again. For a while.
But barring a worst-case global pandemic, you can look forward to containment and an effective treatment and/or vaccine.
Looking back a year from now, this will almost certainly look like a dangerous situation that was brought under control.
Many of the best minds in biotechnology are already on the case.
The new pathogen’s genome was posted on an open-access repository for genetic information weeks ago. Thousands of scientists around the world are sharing data to treat the disease and create a vaccine.
Laboratories here and abroad are scaling up production of experimental drugs that were initially developed to combat SARS to see if they show promise against the new coronavirus.
At this stage, the chance of the virus tipping the U.S. economy into a recession is slim.
There are just too many other positives right now, including low inflation, record employment, microscopic interest rates, a strong dollar, cheap oil and natural gas, and rising business and consumer confidence.
Yes, China is both a major supplier and customer for American corporations.
But as Federal Reserve Chairman Jerome Powell noted in a recent news conference, “85% of the U.S. economy is domestic.”
So don’t interpret the market’s sudden dip and rebound as a sign that investors have lost their senses.
This is simply the growing recognition that the outbreak is not the kind of threat that would justify overhauling your portfolio.
It’s hard for many to accept when the headlines are scary, but sometimes the smartest thing an investor can do is sit on his hands.