All three major indexes recorded their worst day in months.
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Topline: It’s a big week for the market with a host of major companies set to report earnings as stocks pare back from near-record highs on rising concerns over the severity and economic impact of the deadly Chinese coronavirus.
- It’s a huge week for earnings with Apple, Starbucks, Facebook, Amazon and others all reporting, even as investors grapple with the financial fallout from the deadly coronavirus.
- Amazon is expected to report $86 billion in sales and earnings per share of $4.05, and Tesla is expected to bring in $7.05 billion in revenue and earnings of $1.65 per share.
- Typically during a week like this, all attention would be on earnings alone, but China’s coronavirus is playing a huge role in the direction of stocks as the disease rapidly spreads with no vaccine in sight.
- Making things even more risky for investors is a market that’s trading at “unsustainable valuations,” according to Adam Crisafulli, founder of Vital Knowledge, who says that the coronavirus is acting as an added headwind at a time when stocks are becoming “extraordinarily sensitive to even the smallest setbacks.”
- The spreading virus is already having an impact on consumer demand and tourism during the busy Lunar New Year period (almost 50 million people and more than a dozen cities are currently on lockdown), and US companies with businesses in China are not exempt from the pain as some have already closed stores in the region.
- Hotels, airlines, cruise and casino operators, big retailers and consumer goods companies have all so far been affected by the financial impact of the coronavirus.
Crucial statistics: All three major indexes are off to a rough start this week after recording their worst losses in months on Monday. The S&P 500 was down 1.3%, while the Nasdaq Composite plunged 1.7% and the Dow Jones Industrial Average lost 1.4%. It was the Dow’s worst single-day drop since October 2, the S&P’s worst since October 8 and the Nasdaq’s worst since August 23, according to Dow Jones Market Data. Crude oil prices also hit a three-month low on Monday, with U.S. West Texas Intermediate falling to $53 per barrel.
Crucial quotes: “Hopes that the virus would be contained were squashed over the weekend,” says Ryan Detrick, senior market strategist for LPL Financial. “Although historically these outbreaks have been buying opportunities, the bottom line is investors are taking a sell first and ask questions later approach right now.”
“The Chinese economy—and possibly the world economy—will take a hit in the short run and lower prices are a rational response to the increasing spread of the coronavirus,” predicts Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “However, over the medium term, this will likely prove to be a buying opportunity.” Zaccarelli compares the coronavirus with the SARS outbreak: During the 5-month period starting in mid-November 2002 until mid-March 2003, the S&P 500 dropped 12% but ended up actually finishing that year 19% higher than where it started, he notes.
Big numbers: As the coronavirus spreads at an accelerating rate—with China’s quarantine measures apparently not slowing the rate of infection—investors are wondering when the number of cases will start to level off. If the coronavirus becomes as dangerous as the 2002-2003 SARS outbreak (which killed some 800 people and wiped $40 billion off of world markets, according to one study), then it could impact China’s already slowing economic growth. “Even in the best-case scenarios where the virus is contained over the coming weeks, China’s Q1  economic statistics will likely suffer a large blow,” Crisafulli wrote in a note on Monday. The Economist Intelligence Unit, for instance, recently forecast that China’s annual projected growth rate of 5.9% would be dragged down by 0.5% to 1% in total, while S&P Global warns that the virus could slice as much as 1.2%.
What to watch for: Some public health experts recently estimated that the number of Chinese residents infected with the virus is substantially larger than the cases reported by the government so far. The outbreak comes at an inopportune time for China, which is already facing challenges such as rising food prices and slowing GDP growth, as well as ongoing trade tensions with the U.S. and political challenges in Hong Kong.