By Caroline Baum, MarketWatch
ANDREAS SOLARO/AFP via Getty Images
It was only last week that China’s rapidly spreading coronavirus was sending tremors through world financial markets. On Friday, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.36% plummeted 603 points, or 2.1%, its biggest one-day loss since August.
But by then, the U.S. stock market had moved on. Stocks rallied Monday, helped by signs that manufacturing was stabilizing, and soared on Tuesday, registering their biggest gain since August, with the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.66% setting a new high. Stocks followed Tuesday’s gains with another strong performance on Wednesday, with the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.38% setting a record.
With the list of reasons to fear the spillover effects of the coronavirus on the global economy getting longer by the day, the stock market seems to be saying, all’s right with the world.
Not so fast. The stock market is often seen as a stand-in for the economy — or a leading indicator of what’s to come — but at times it has gotten ahead of itself. Some caution is advised.
For starters, stocks are not cheap. The forward 12-month price/earnings ratio for the Standard & Poor’s 500 Index is 18.4, above the five- and 10-year average, according to FactSet.
It is even more expensive based other metrics, such as Robert Shiller’s cyclically adjusted P/E ratio .
Each day brings new concerns about the repercussions from the rapidly spreading coronavirus, with about 28,000 confirmed cases and more than 550 deaths.
Businesses and factories in Wuhan, where the virus was believed to have originated in a live-animal market, and across China have been shuttered. World supply chains have been disrupted. Airlines have canceled flights to and from China. Entire areas have been quarantined. Hubei Province has been completely sealed off. Chinese authorities extended the Lunar New Year holiday for a week to restrict public movement. Consumers are on lock down at home.
Even casinos in the gambling mecca of Macau were ordered to shut their doors for at least two weeks. And on Tuesday, after shutting half its stores in China, Nike Inc. /zigman2/quotes/203439053/composite NKE +0.97% became the first big consumer company to warn of the impact of the virus on its business.
Under the circumstances, China may be hard-pressed to meet its pledge to buy an additional $200 billion of U.S. goods over the next two years, which was part of the phase-one trade deal.
Economists at Standard Chartered expect the effect of the virus to cut China’s first-quarter real gross domestic product growth from 6% to 4.5%. In light of China’s important role in global manufacturing and trade, not to mention its increasingly large market for consumer goods, the spillover effect on the U.S. is likely to lower real GDP in the first quarter by 0.4 to 0.5 percentage point, to be mostly made up in subsequent quarters, according to Goldman Sachs economists.