Coronavirus and the Stock Market

Fears of the coronavirus disrupting international trade as well as the Chinese domestic economy activity has bumped economic news and possibly earnings reports from being primary movers of the stock market in the near term.  So, while upcoming US economic data are likely to confirm slightly above-trend GDP growth, indications that the spread of the virus is under control may be what is needed to lift stocks at this point. 

A prior virus scare was the Ebola outbreak that showed up in the US in September 2014.   The market's impact lasted about a month during which the S&P 500 Index fell about 3.0%.  A similar market response now would bring the Index down to about 3200 from about 3300 last week. The current situation could be worse, however, given China's importance in world trade.  A virus-related disruption of trade would have a larger negative impact on the world economy than this earlier virus.

The market may hope for some word of hope by the Fed at this week's FOMC Meeting.  While Powell may mention the virus as a downside risk to the outlook, evidence of its impact on US economic activity will likely be needed to persuade officials to ease policy.  This dependency, in fact, would be no different from its current policy approach of being guided by the upcoming data and their implications for the outlook.   So, any solace for the market from Powell comments should be short-lived.

The market may get some solace from decent US economic data this week, but not all the risks are supportive.  /1/ Consensus looks for a modest 0.2% m/m increase in December Ex Transportation Durable Goods Orders -- a positive for the markets given all the negative sentiment about manufacturing.   But, an anticipatory decline in Boeing-related orders is a downside risk.   /2/ The consensus estimate of a slightly above-trend 2.1% for Q419 Real GDP Growth would seem to be more reasonable than the Atlanta Fed models' trend-like 1.8% estimate, given the decline in the Unemployment Rate in the quarter.  Note that both estimates could change from evidence in the Durable Goods report.  /3/ The consensus estimate of 0.1% m/m for the December Core PCE Deflator, with the y/y steady at 1.6%, risks being too low.  Because of the jump in airfares in the PPI, the risk is for a 0.2% m/m increase.  The y/y could rise to 1.7%.  This result would be a market negative since it argues against Fed easing.

While the initial impact of the coronavirus scare seems to be dis-inflationary, as oil prices have fallen sharply, the opposite may be true ahead if trade disruptions lead to shortages.