By Michael Brush, MarketWatch
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 /zigman2/quotes/208854639/composite RCL +7.27% , 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 /zigman2/quotes/207508890/composite SBUX +0.42% , Walt Disney /zigman2/quotes/203410047/composite DIS +1.25% , Nike /zigman2/quotes/203439053/composite NKE +0.97% , Estée Lauder /zigman2/quotes/200740220/composite EL +1.50% , Wynn Resorts /zigman2/quotes/208845907/composite WYNN +3.83% , Las Vegas Sands /zigman2/quotes/208792014/composite LVS +2.27% , Marriott International /zigman2/quotes/200170042/composite MAR +7.38% , Hyatt Hotels /zigman2/quotes/207542923/composite H +2.00% , Yum China Holdings /zigman2/quotes/208495167/composite YUMC +1.36% , IMAX /zigman2/quotes/205456197/composite IMAX +2.06% , PVH /zigman2/quotes/208313660/composite PVH +4.73% , Tapestry /zigman2/quotes/207417762/composite TPR +4.34% , and GreenTree Hospitality Group /zigman2/quotes/206548193/composite GHG +8.89%
Of course, if there’s a massive coronavirus outbreak in China, all bets are off, but that’s not my base case. To track the progress, see this map from Johns Hopkins .
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.