What To Make Of The Wild Chinese Stock Market Swing And Its Impact On The US

Despite a rising death toll and more than 20,000 confirmed cases of coronavirus infections in China, U.S. stocks came roaring back on Tuesday, seemingly shrugging off concerns that the virus could weigh on the Chinese economy and potentially negatively impact the entire global financial system.

Chinese stocks rebounded from a sharp decline on Monday after Reuters reported that the Chinese central bank could cut interest rates and bank reserve ratios in addition to its aggressive liquidity injections announced earlier this week. The People’s Bank of China said it plans to inject $174 billion of liquidity into its financial markets.

Market experts have been comparing the Wuhan coronavirus to its predecessor SARS, which triggered a temporary market sell-off back in 2002 and 2003.

See Also: A History Of Coronavirus Outbreaks And The Stock Market

How To Play It

Wall Street analysts have estimated the virus will negatively impact China’s 2020 GDP growth by between 0.2% and 1.0% depending on the ultimate severity of the outbreak. On Monday, Joe Brusuelas, chief economist at RSM US LLP, said those estimates appear to be optimistic at this point.

“What is certain is that the Chinese economy is going to grow at a pace far less than the official 6% target through the first 90 days of 2020. More difficult to ascertain is the regional economic impact and damage to a domestic system of finance already strained by escalating defaults and bankruptcies,” Brusuelas said.

UBS analyst David Lefkowitz said last week there are several ways for investors to approach the coronavirus volatility.

“Add defensive exposure in areas like quality and high dividend stocks. Investors can also use the dip to gain exposure to emerging market equities—which remains our most preferred regional equity market—or enter into long-term investments at a discount,” Lefkowitz said.

Looking Ahead

Aaron Boesky, CEO of Marco Polo Pure Asset Management, told Benzinga he and his China-focused fund are monitoring the situation closely, and the markets seem to be reflecting the swift and decisive measures undertaken by the Chinese government this week.

“The impact of the virus on the economy will likely be significant but limited to a single quarter. Expectations and models are already building in this impact. It’s a negative impact which is limited to a short timeframe and does not materially change the long-term outlook. This lends itself to markets which are willing to adjust expectations and move forward,” Boesky said.

The bullish trading action on Tuesday seems to echo Boesky’s take that the market is already beginning to look past the coronavirus outbreak. Over the past five trading sessions, both the SPDR S&P 500 ETF Trust SPY and the iShares FTSE/Xinhua China 25 Index FXI are up about 1% overall.

Benzinga’s Take

During the peak of the SARS scare from December 2002 to April 2003, the S&P 500 dropped 8.3% and stocks related to discretionary spending and emerging markets (particularly China) underperformed. The good news is that over the next six months after the scare, the S&P 500 more than made up for its losses, gaining 18.6%.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.