How the coronavirus outbreak could impact markets

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Research Analyst Puneet Thiara discussed potential market impacts of the coronavirus outbreak. They also reviewed the latest numbers from fourth-quarter earnings season as well as newly released global purchasing managers’ (PMI) indices.

Market jitters rise as coronavirus spreads

The outbreak of the coronavirus in China commanded the attention of financial markets the week of 20 January, Eitelman said, leading to an increase in market volatility. While the outbreak has the potential to significantly disrupt the global business cycle, such a scenario represents the extreme end of things, he noted. "So far, the coronavirus appears fairly contained, and is more or less following the playbook of the 2002-03 SARS (severe acute respiratory syndrome) outbreak centred in China and Hong Kong," Eitelman explained. At the moment, the virus is simply a risk factor that needs to be watched, he said.

So, how did the SARS outbreak affect financial markets? It led to downward pressure on stocks in the region, Eitelman said, noting that Hong Kong’s equity market index sold off approximately 10% to 15% in early 2003. However, markets rebounded fairly quickly afterwards, he pointed out.

"For financial markets, the key lesson learned from the SARS outbreak is that if a disease is ultimately contained, a rapid bounce-back in markets and a quick normalisation in economic conditions is possible," Eitelman stated.

Key week for earnings season looms as tech companies set to report

Switching gears to earnings season, Eitelman said that of the roughly 20% of U.S. companies that have reported so far, approximately 70% are surpassing expectations. "It’s important to note that the bar for fourth-quarter earnings was set quite low, with consensus expectations calling for another period of negative earnings growth," he said.

Financial companies have been reporting solid results, Eitelman said, with signs of strength also emerging from the U.S. tech sector. The week of 27 January will likely be the key week for earnings, he said, with large tech companies such as Microsoft, Amazon and Facebook due to report. "These businesses are faced with much loftier earnings expectations - and whether or not they’re able to beat such expectations will probably drive the direction of the market in the very short-term," Eitelman stated.

Preliminary numbers point to pickup in global manufacturing

New data released the week of 20 January offered an early read on global economic performance during January, Eitelman said, explaining that the initial signs are positive. “Flash PMI numbers from the U.S., Europe and Japan indicate that industrial activity is picking up,” he said, noting that this is in line with the projections in Russell Investments’ recently released 2020 Global Market Outlook.

The China-U.S. trade war was likely the primary catalyst for the slowdown in global manufacturing, Eitelman explained, and the recent phase-one deal between the two countries has already led to an uptick in business confidence. "Now, we’re also starting to see a bounce in the hard data as it relates to economic activity," he said, stressing that even though it’s late in the economic cycle, potential exists for stronger economic and earnings fundamentals in the short-term.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.