How contained is the coronavirus outbreak? That’s the question that rattled markets on Monday, sending the Dow industrials down more than 1,000 points, or 3.6%. The S&P 500 index declined by 3.4%.
While coronavirus, or COVID-19, has been in the news for weeks, until recently stock investors seemed confident it would be contained. After a brief market drop in late January, the S&P quickly resumed its upward climb, reaching new record highs in February.
“Complacency has been evident with regard to the stock market’s behavior and the impact of the coronavirus on global growth,” says Schwab Chief Investment Strategist Liz Ann Sonders. “The initial outbreak of the virus conspired to shake that optimism, but after a mild 3.3% pullback in late January, complacency built yet again on hopes of a containment of the virus.”
Containment is key
On Monday, the World Health Organization said the virus had infected more than 79,000 people worldwide and killed at least 2,600, mostly in mainland China. However, outbreaks also have been reported in other countries, including South Korea, Italy and Japan; there have been 35 confirmed cases in the United States.
“Other than during wars, the scope of the shutting down huge swaths of the world, associated with the virus, is unprecedented,” Liz Ann says. “There are about 60 million people in China alone that are quarantined.”
Many comparisons have been analyzed between the coronavirus and the SARS outbreak in 2003. However, in the years since that outbreak, China has become a much greater global economic force. It’s now the world’s second-largest economy, behind the United States. Not only is China a key player in the global supply chain, Chinese consumers play a big role in global demand.
And the virus is no longer just China’s problem. “Italy and South Korea—the eighth- and 12th-largest economies in the world, respectively—have shut down public buildings, sporting events and schools in parts of those countries. In the case of Italy, at least 10 towns around Milan have gone under lockdown,” Liz Ann says.
Beginning late last week, investors accelerated their embrace of “risk-off” investments, flocking into defensive equity sectors such as utilities, and to perceived “safe haven” investments such as Treasury bonds.
However, long-term investors should not overreact, Liz Ann says.
“We continue to recommend that investors focus on diversification and rebalancing, and an emphasis on quality growth at reasonable prices, with a bias toward more defensive larger-cap stocks at the expense of more-cyclical smaller cap stocks,” Liz Ann says.