‘We don’t expect these factors supporting investor confidence and consumer spending to change anytime soon’
Investor fears about the coronavirus are overblown.
So Monday’s biggest one-day percentage declines since early October in the Dow Jones Industrial Average DJIA, +0.66% and the S&P 500 index SPX, +1.01% on coronavirus fears have created nice buying opportunities in 14 stocks with lots of exposure to China.
Before we get to those, here are five reasons why investors are panicking too much about coronavirus.
1. Past contagious disease breakouts have been contained
The big unknown here is how deadly and contagious coronavirus is. No one really knows, but medical experts at Johns Hopkins are downplaying the threat from 2019-nCoV, the name for the type of coronavirus grabbing headlines.
“The immediate health risk from 2019-nCoV to the general public in the United States is thought to be low at this time,” says Gabor Kelen, a medical doctor and director of the Johns Hopkins Office of Critical Event Preparedness and Response.
Even if coronavirus turns out to be as contagious and deadly as really bad contagious diseases like Ebola, it will most likely be successfully curbed. The Ebola outbreak a few years ago was effectively kept in check, and so were the Severe Acute Respiratory Syndrome (SARS) outbreak of 2003-04, and the Middle East Respiratory Syndrome (MERS) outbreak early last decade.
“All three outbreaks were contained before they could have a significant impact on the global economy or financial markets around the world,” says Ed Yardeni, of Yardeni Research. “We expect the same outcome with the current outbreak.”
The good news is that health officials learned a lot about containing virus outbreaks from those three experiences.
“Health technology has advanced considerably,” says Andrew Tilton, the chief Asia economist at Goldman Sachs. “Chinese authorities have already sequenced the virus and shared it with the global health community, and the U.S. Centers for Disease Control have just developed a test for the virus.”
Another positive is that public awareness seems to be much higher, because of the more rapid ofﬁcial response in China and the internet and social media, says Tilton. Local authorities in China reported SARS quickly in early January 2003. But up the chain of command, officials dragged their feet. The ﬁrst official press conference on SARS did not happen until Feb. 11.
2. The lockdown affects a small part of China
But what about the lockdown? Even if coronavirus is contained, won’t the lockdown have a big impact on China’s economy? Probably not, at least as things stand now. The cities locked down are all near Wuhan, in Hubei province, where coronavirus originated. So far, the lockdown affects only around 60 million people out of a population of 1.4 billion.
Likewise, Hubei province only produces about 4.7% of China’s overall GDP, according to the National Bureau of Statistics of China.
3. The breakout happened at an opportune time
China’s economy was about to wind down anyway for the Chinese New Year celebration when the outbreak occured. So productivity was already scheduled to take a seasonal dip.
To the extent that the virus in China creates domestic fear and unrest, or hurts the economy, it weakens China’s Premier Xi Jinping’s hand in tariff negotiations with the U.S. This suggests and easier path toward progress, which would be a positive for business confidence and the U.S. stock market.
Of course, the bad news here is that a lot more people in China have travel plans around the New Year. This could make the virus spread more quickly.
4. The public typically tends to overreact to health threats
Whenever there’s a new virus outbreak, people are egged on by the media echo chamber, which latches on to the story and repeats it ad nauseum, drilling fear and concern into the minds of investors and the general public alike. The same thing happens on social media, where rumors can spread unchecked.
This amplifies the perception of risk, but not the risk itself. At some point and perhaps soon, the media and Twitter will move on to the next story of the day, and coronavirus fears will ease.
The echo chamber impact was compounded by the following problem: Investor sentiment was extremely high going into this (both the Dow and the S&P set the latest in a string of records on Jan. 17), which made the market more vulnerable to “bad news” and negative headlines. Overconfident investors are convinced that nothing can go wrong. So when something negative crops up, they’re surprised and they feel betrayed, which escalates their selling.
Part of the exaggerated reaction to coronavirus is linked to the fact that it is new, and emanating from a foreign country. The fears about it seem irrational, if you consider the following contrasts. So far, coronavirus has claimed fewer than 100 lives. SARS, which also sparked widespread panic and investor selling, claimed hundreds of lives, and fewer than 10,000 cases were reported.
In contrast, other flu viruses in circulation in the U.S. last year took over 34,000 lives, and they are taking a similar toll this year. Yet unlike coronavirus and SARS, these flu viruses have had zero impact on the stock market. This suggests the current hysteria developing about coronavirus is irrational.
5. Any economic impact will be short lived
Coronavirus fears could hit travel globally, and produce a decline in consumer spending in Asia and the U.S. But the effect tends to wear off pretty fast. “These retrenchments in spending are short-lived as consumers eventually get frugal fatigue,” says Jay Bryson, acting chief economist at Wells Fargo Securities.
One fear is that there could be enough of a pullback in consumer spending and travel to hit economic growth. But again, the effect will probably be limited. “The negative impact on growth and asset prices from viral outbreaks typically normalizes within a few months,” says Tilton at Goldman Sachs.
“The outbreak of the coronavirus could drive large swings in Mainland China and emerging Asia growth in the first half but a much smaller impact on full-year growth, if the SARS episode is any guide,” says JP Morgan economist Bruce Kasman.
Several recent developments will continue support the economy and the stock market, says Baird chief investment strategist Bruce Bittles. He cites recent progress on U.S.-China trade talks, an accommodative Federal Reserve, low interest rates, and muted inflation. “We don’t expect these factors supporting investor confidence and consumer spending to change anytime soon,” he says.
What stocks to buy
All of this suggest stocks hit particularly hard because they have exposure to China look like buys here.
Take Royal Caribbean Cruises RCL, -0.19%, for example.
“If history is any guide, the weakness in Royal’s stock could present a compelling buying opportunity as consumers have been fairly quick to shrug off illness outbreaks in recent years,” says William Blair analyst Sharon Zackfia. The cruise industry actually did better after the SARS outbreak and “more recent outbreaks such as Zika or Ebola have had no discernible impact on cruise demand,” she says.
Also consider U.S. companies getting hit hard in the past few days because of China exposure. They include: Starbucks SBUX, -0.01%, Walt Disney DIS, +0.25%, Nike NKE, +0.10%, Estée Lauder EL, -0.06%, Wynn Resorts WYNN, +0.19%, Las Vegas Sands LVS, +0.17%, Marriott International MAR, +2.36%, Hyatt Hotels H, +1.38%, Yum China Holdings YUMC, -0.33%, IMAX IMAX, +1.92%, PVH PVH, -1.33%, Tapestry TPR, +0.61%, and GreenTree Hospitality Group GHG, +0.33%
Of course, if there’s a massive coronavirus outbreak in China, all bets are off, but that’s not my base case.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. During the past 10 years, Brush has suggested RCL, SBUX, WYNN, DIS, MAR and H in his stock newsletter Brush Up on Stocks.