- U.S. stocks are recovering, but the rally might not lost as the coronavirus pandemic spreads.
- If the U.S. starts to impose large-scale quarantines after predictions of widespread infection, stocks are likely to pull back again.
- Italian and South Korean stock indexes dropped 11% and 5%, respectively, after lockdowns were imposed on two major cities.
The U.S. stock market recorded its largest rally in 12 years Friday, as the Dow Jones Industrial Average (DJIA) surged 9.4% in a single day. Yet, analysts remain highly cautious about the Monday open.
Quarantines and lockdowns in countries like Italy and South Korea triggered massive selloffs in the stock market. With certain U.S. states like Massachusetts at risk of seeing a larger epidemic, the stock market recovery may be upended in short order.
Stocks will react to major coronavirus developments
In the short-term, the U.S. government’s decision to open up $50 billion to support the containment of the coronavirus outbreak is expected to speed up efforts to increase the testing capacity of coronavirus.
Equities responded positively to the strong approach of the U.S. government towards handling coronavirus, following President Donald Trump’s speech that the administration will spare no resources to combat the outbreak:
The action I am taking will open up access to up to $50 billion of very importantly, very important, and a large amount of money for states and territories and localities, in our shared fight against this disease. We’ll remove or eliminate every obstacle necessary to deliver our people the care that they need, and that they’re entitled to — no resource will be spared, nothing whatsoever.
A large part of the government’s initiative is centered on a relief package struck between House Speaker Nancy Pelosi and President Trump. The package is aimed at resolving “outstanding challenges” to tackle coronavirus.
The stock market is unlikely to be pricing in potential difficulties in executing the relief package or the possibility of a lockdown on major cities.
According to Andy Slavitt, former Medicare, Medicaid & ACA head for the Obama administration, President Trump has said he is not fully committed to the deal.
Large-scale quarantines could spark fear again
Fred Hutch scientist Trevor Bedford has predicted that there already could be 20,000 coronavirus cases in the U.S. based on existing data. Any sign of pullback from the administration in aggressively combating the outbreak could negatively affect the already unstable stock market.
Thus, a rough guess would be a ~20 sparks that caught between Jan 15 and Feb 15 and have resulted in growing outbreaks, each of which on average will be around ~1000 infections, some bigger than others. This would be an extremely rough ~20k infections in the USA.
If there are tens of thousands of coronavirus cases in the U.S. already as some models suggest, then the probability of Massachusetts and some other states becoming vulnerable to an Italy-like coronavirus outbreak is higher.
According to financial analyst Jim Jordan, the full economic ramifications of the virus outbreak have not been appreciated yet, with key sectors outside of travel seeing a significant drop-off.
“It’s not just airlines and travel industries getting crushed – restaurants are down huge because of fears of getting coronavirus. The economic ramifications of this outbreak are yet to be fully appreciated, as crazy as it’s already been,” Jordan said, citing a chart from Opentable showing a substantial decline in the number of diners.
When the Italian government imposed a complete lockdown on Northern Italy affecting 16 million people, the FTSE MIB dropped by 11% the following day.
A similar trend was seen in South Korea; when the country imposed a lockdown on the metropolitan city of Daegu, the KOSPI plunged by 5% the next day, causing panic in the market.
This article was edited by Sam Bourgi.