Tuesday, February 25, 2020
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The story is now much bigger than China
The stock market on Monday got slammed.
All three major indexes fell more than 3%. The Dow dropped more than 1,000 points for just the third time in its history. For the Dow and the S&P 500, Monday was the worst day in two years.
Fears over coronavirus were cited as the proximate cause of this market stress.
Just a week after Apple (AAPL) announced that it would not meet its first quarter revenue guidance because of coronavirus and just three trading days after all three major indexes hit record highs, the coronavirus story has completely changed for investors.
And the reason why is simple — this is no longer just a China story.
When coronavirus first hit the radar of investors in January, the World Economic Forum in Davos was just underway and analysts were noting that the economic impact of global disease outbreaks, “rarely have a long-lasting and widespread effects on equities.” This narrative had remained largely intact for the last month, even as the bond market indicated investors making increasing bets on global growth slowing.
Over the weekend, news regarding increasing confirmed cases in Italy and South Korea served as the most significant signs yet of the virus’ spread beyond China. Data from Bloomberg published Monday showed that of the six places with the fastest growing case counts, four are outside China — South Korea, the Diamond Princess cruise, Italy, and Japan.
Reports over the weekend suggested that “millions” of Chinese firms are at risk of going under if the economy doesn’t unfreeze. And estimates about when China’s economic stasis could end are starting to have the faint air of Boeing’s estimates about when the 737 Max could fly again. A story that continues to drag out almost a year after the second of the 737 Max’s two deadly crashes.
Polling data from DataTrek Research published Monday indicated that 44% of respondents thought China would contain the coronavirus some time in the second quarter. But the firm’s polling showed that “there is little consensus among our survey takers about a strong Chinese economic rebound in 2H 2020. This may be more of a 2021 story based on what we all know today.”
A view that stands in contrast to the initial market read-through from the Apple story last week, a story that hinged on coronavirus-related disruptions serving as merely that: disruptions.
The virus’ accelerating spread beyond China and the increasingly strong measures by government and global health officials risks making economic impacts more severe than estimated. And makes many of these estimates seem conservative.
Economists at Goldman Sachs, for instance, this weekend published their latest views on how supply chains could be impacted by the coronavirus.
The firm wrote in part that, “According to our analysts, no covered US firm has reported any reduction in production in the US due to supply chain disruptions thus far, and the majority of companies in many sectors have enough inventory to continue production as normal for the remainder of the quarter.”
Adding that, “Many sectors also have little to no exposure to inputs from China, and are thus unlikely to be exposed to supply chain production disruptions even if the coronavirus outbreak persists further... Several sector analysts also stated that companies in their coverage had increasingly moved supply out of China due to the trade war.”
And while the firm did increase its estimates for the negative GDP impact the coronavirus would have on the U.S. economy in the first quarter — Goldman now sees GDP taking a 0.8% negative hit, up from an estimated 0.5%-0.6% previously — the firm still thinks a bounce back in the last three quarters of the year will be a tailwind for growth.
I think it’s reasonable to say Goldman still has a fairly positive view of how the global economy is likely to weather the coronavirus storm.
The market, however, clearly disagrees. Investor reaction on Monday suggests the assumption that coronavirus will be more of a “demand delayed” than a “demand destroyed” situation for the global economy is becoming increasingly perilous.
“Investors always invest with uncertainty, and the carousel of concerns continues,” said Keith Lerner, the chief market strategist at SunTrust Advisory Services. “However, with stock prices and valuations still near cycle highs, the risk of a worsening virus outbreak has not been priced into the market to a great extent.”
A process it seems investors undertook in earnest on Monday.
What to watch today
9:00 a.m. ET: FHFA House Price Index, December month on month (0.4% expected, 0.2% prior)
9:00 a.m. ET: S&P CoreLogic 20-City home price index, December month on month (0.45% expected, 0.48% prior)
10:00 a.m. ET: Conference Board Consumer Confidence, February (132.1 expected, 131.6 prior)
10:00 a.m. ET: Richmond Fed Manufacturing Index (13 expected, 20 prior)
6:00 a.m. ET: Home Depot (HD) is expected to report adjusted earnings of $2.11 per share on revenue of $25.75 billion
6:55 a.m. ET: Macy’s (M) is expected to report adjusted earnings of $1.97 per share on revenue of $8.32 billion
4:00 p.m. ET: GW Pharmaceuticals (GWPH) is expected to report an adjusted loss of 5 cents per share on revenue of $103.92 million
4:05 p.m. ET: Virgin Galactic Holdings (SPCE) is expected to report an adjusted loss of 21 cents per share on revenue of $750,000
4:05 p.m. ET: Salesforce (CRM) is expected to report adjusted earnings of 56 cents per share on revenue of $4.75 billion
4:05 p.m. ET: Smile Direct Club (SDC) is expected to report an adjusted loss of 9 cents per share on revenue of $199.92 million
4:05 p.m. ET: WW International (WW) is expected to report adjusted earnings of 38 cents per share on revenue of $330.22 million
4:05 p.m. ET: Planet Fitness (PLNT) is expected to report adjusted earnings of 41 cents per share on revenue of $187.17 million
4:05 p.m. ET: The RealReal (REAL) is expected to report an adjusted loss of 19 cents per saher on revenue of $91.43 million
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