Stocks shrug off the coronavirus outbreak

“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.

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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.