Coronavirus: Market Concerns Mount

The narrative has been captured in part by the parallels with the SARS (severe acute respiratory syndrome) virus back in 2003.  SARS spread rapidly, eventually peaked and then came under full control.  While the pace and ability to contain the Wuhan coronavirus will differ from SARS because medical research has improved and China is moving much more aggressively, many epidemiologists expect a similar pattern in terms of exponential expansion, a topping off, and then a relatively quick containment.  See Figure 2 to visualize the spread of SARS in 2003.

According to news reports, what is critically different from SARS this time around is that the Wuhan coronavirus can spread prior to symptoms appearing.  This very different aspect of how the virus spreads will complicate containment and is potentially what is driving the initial market reaction.

Market reactions are likely to follow the narrative as it develops in the news cycle.  As long as the narrative puts the progression of the virus as moving up the curve, then markets will be worried, and the worries may spread.  Indeed, starting the week of January 20, 2020, traders and investors began to fear the economic repercussions of the aggressive moves by China to contain the spread of the virus.  Oil markets realized the potential for lower demand quickly, as did the Chinese yuan.  The flight to quality moved into US Treasuries, with yields lower (prices higher) and gold prices higher a few days later, then global equities responded on Monday, January 27, 2020, after the weekend news cycle.

Once the news cycle narrative moves to the containment phase when new cases start to decline rapidly, then the most likely outcome is for a reversal in most markets as fears abate.  Full price recovery for the markets hit the hardest may take some time, as we analyze the economic impacts on China and global growth.  Our bottom line at this early stage is to follow the narrative, and then move quickly when the narrative shifts direction.