February was quite the wake-up call for investors with the S&P 500 falling 13% from it’s all-time high over the course of only 7 trading days^….with not a single one of those days ending positive. As the coronavirus (COVID-19) continued to spread the markets largely ignored it until one day, out of the blue, it appeared to take notice.
While the speed of the most recent correction has been unusual, so far the depth of the fall has been quite ordinary. In fact, in terms of depth, the current episode looks a lot like the Zika virus about 4 years ago when the market fell 12% over the course of about a month and a half (between 12/29/15 - 2/12/16).
It is also very reminiscent of another coronavirus outbreak, SARS, in 2003. In that episode the S&P 500 fell 14% in a little less than 2 months (between 1/14/03 - 3/11/03).
Economically, what is quite different about this episode as opposed to SARS in 2003 (which also started in China) is that China now makes up about 19% of global GDP....Compared to only about 4% in 2003.
While everyone focuses on the role of China in manufacturing, the sole focus on manufacturing is a pretty outdated view. What is often overlooked is the pivotal role the Chinese consumer plays for US companies. In fact, Starbucks has over 4,100 stores in China1…. More than twice the number of any other country outside of the US. General Motors sells more cars in China than in the US2. From a big picture lens, China is the third largest market for US goods and service exports3 and one of the most important markets for many US companies as it relates to meeting their growth assumptions.
The ripple effects on supply chains and global tourism from the unprecedented efforts China took in locking down cities, factories and airports is simply unknowable. Compounding this is the ongoing spread to other countries which has resulted in additional unprecedented measures. Cases in the US have likely been largely under-reported up to this point due to the shortage of functional test kits4. It is this uncertainty that is hard to calculate. Has the market over-reacted? Will the market recover relatively quickly as in other outbreaks? Only time can tell.