Stocks shrug off the coronavirus outbreak

Investors have shrugged off the disruption to the markets caused by the outbreak of coronavirus.

“It’s still far from business as usual in the world’s second-largest economy,” says Michelle Toh on CNN. Three weeks after the coronavirus outbreak prompted the closure of factories, offices and schools in China, emergency public holiday extensions are coming to an end. 

Some factories have reopened with strict screening precautions and many businesses are encouraging employees to work from home. Yet others have extended leave for another week and in Hubei, the province at the centre of the outbreak, “life remains mostly at a standstill”. 

A global growth hit

Investors have shrugged off the ongoing disruption caused by the virus. Global equities rose by 3.1% last week and have regained the bulk of coronavirus losses, notes Rupert Thompson of wealth manager Kingswood. American stocks enjoyed their best weekly gain since last June. 

The S&P 500 and Nasdaq indices and Europe’s Stoxx 600 index all hit new record highs this week. Asian and emerging markets have recouped about half of their losses. China’s CSI 300 index has gained 7% over the past week.

The market has concluded that the crisis is a temporary problem and will be followed by a V-shaped recovery, says Mohamed El-Erian on Bloomberg. Yet disruption to complex global supply chains is generating “cascading spillovers” as factories within and beyond China are forced to slow down production for want of the correct widgets. 

On the demand side, retail and services are taking a hammering as consumers and tourists stay at home. We could be in line for a “U” or even an “L”-shaped denouement. 

The world economy will probably stall this quarter because of the outbreak, says Simon MacAdam of Capital Economics. That will end a 43-quarter streak of growth and will cost the global economy $280bn in lost output. Yet provided the virus is contained soon, that number should be made up for in subsequent quarters. This epidemic “will probably end up just delaying the global economic recovery in 2020, rather than cancelling it altogether”.

The bull charges on

“Trade wars, Middle East turmoil and now the coronavirus” – it seems that “nothing is capable of dislodging America’s long bull market, now in its 12th year,” says Jeremy Warner in The Sunday Telegraph. That long run comes despite the fact that valuations are sky-high. The S&P 500’s cyclically adjusted price/earnings ratio (Cape) is now higher than it was before the 1929 Wall Street crash. We are “very obviously in bubble territory”.

The latest market bounce back follows a familiar pattern, says Neil Shearing of Capital Economics. A growth shock is quickly followed by the conclusion that easy money from central banks will “put a floor under risky assets”. 

The risk, of course, is that low interest rates may pump up a dangerous financial bubble somewhere. US corporate credit and Chinese property are the most likely candidates to bring the party to an abrupt and destabilising end.

Recommended

Ocado faces a “crunch” year – should you buy or avoid?
Share tips

Ocado faces a “crunch” year – should you buy or avoid?

Ocado was one of the big winners from the pandemic as customers moved online. But now it’s struggling, and losses are growing. So, asks Rupert Hargrea…
27 May 2022
What to buy as the tech-stock bull market crashes
Tech stocks

What to buy as the tech-stock bull market crashes

The decade-long bull market in tech stocks has come to a rapid halt. Investors need to distinguish solid stocks from speculative ones rather than just…
27 May 2022
Will the rise of ESG investing cause stagflation?
ESG investing

Will the rise of ESG investing cause stagflation?

ESG investing is booming. But it may be contributing to today’s stagflation – slower growth and higher inflation – says Tom Traill.
27 May 2022
Share tips of the week – 27 May
Share tips

Share tips of the week – 27 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
27 May 2022

Most Popular

The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
The Federal Reserve wants markets to fall – here’s what that means for investors
Stockmarkets

The Federal Reserve wants markets to fall – here’s what that means for investors

The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will st…
25 May 2022
Should you be worried about energy windfall tax proposals?
Energy

Should you be worried about energy windfall tax proposals?

Calls have been growing for a windfall tax on UK oil and gas producers. It's a popular idea, but is it a good one? And what does it mean for investors…
24 May 2022