How the Wuhan coronavirus can affect the stock market?

Earlier today, the World Health Organization (WHO) declared the novel coronavirus (2019-nCov) as a public health emergency of international concern. Oddly, the US stock market bounced back despite the news. Does it mean that the coronavirus will have no impact on the stock market? I doubt so.

Fear is setting in

The world has been able to contain potential pandemics in recent history. One might remember MERS, H1N1, Ebola outbreak and SARS, because those are the outbreaks that were covered by mainstream media. This is largely because those viruses reached the USA. Interestingly, there are many other virus outbreaks that were more lethal but did not gain mainstream media attention. You can take a look at the full list here.

So you can see that the actual threat is not really how lethal the virus is, it is more of the fear that the virus can spread and turn into something very detrimental, which will cause the stock market to tank. As of the point which this article was written, the number of infected globally was 9815 and the death toll was 213.

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For the past few days, I am starting to see fear setting in. There are many articles that are talking about the impact of the novel coronavirus outbreak on the economy. Here are some examples:

Business activities are slowing down

I am currently working for a company which is headquartered in China. Drastic measures have been put in to control this outbreak. Employees are forced to continue their Lunar New Year holidays until 7th Feb. We are all advised to avoid non-essential business travels. Our clients are also slower to respond and our vendors too. All these business activities are slowing down during this period.

Internally, to err on the safe side, anyone who exhibits symptoms (e.g fever, runny nose and cough) are expected to self-quarantine. Naturally, there will be people taking advantage of this situation to not work. Productivity is bound to take a hit and all these impact will only be reflected in the next quarter's results.

On a macro level, the slowing down of business activities is also going to hurt the GDP. Again this will only be reflected in the next quarter numbers. The longer this coronavirus outbreak stretches on, the deeper the impact is on the economy.

Impact is still underestimated

There are many people who compare this outbreak with SARS. While that is a logical thing to do, I think the mainstream media are still underestimating the impact. Here is a video that point out why certain comparisons with SARS are flawed and it will be wrong to make those assumptions.

https://www.youtube.com/watch?v=Yq3Y9rmlEQE

The fact now is that this novel coronavirus has already exceeded SARS in terms of the number of infected and is set to spread further. The death rate seems much lower than SARS but it is a flawed comparison as most of the death cases take about a week from diagnosis.

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In spite of all these, the US stock market is still quite resilient and the biggest drawdown, from highest to lowest, is just a mere 3%. Has the market truly reflected the fear and possible impact of this virus? My take is that it has not.

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During SARS outbreak period, there was a maximum drawdown of about 17% and that was during a time when the market just deflated from a dot-com bubble.

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Next, during August 2014, the WHO declared the Western Africa Ebola outbreak as a public health emergency of international concern. The S&P 500 also subsequently saw a 10% drawdown.

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Hence, if history can be used as a gauge, the stock market still has plenty of room to correct. However, it is also important to note that there could be other events that influenced the stock market during that time. For instance, the SARS outbreak also coincide with the Iraq war.

Conclusion

I think this virus outbreak will negatively affect the stock market when fear fully sets in. In addition, the Iowa Caucus coming up on 3rd Feb may also move the market. All in all, the confluence of events seem to mean that it will be turbulent times for the stock market in February. Hence, one might want to wait till things clear up before jumping in to invest.

All that being said, I am not a qualified financial advisor and everyone should be doing their own due diligence when it comes to investing his/her own money.

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