Why did the Coronavirus drop the stock market so fast?
The stock market is a forward-looking investment mechanism and is always pricing in the future earnings expectations today. The Coronavirus is a highly contagious and dangerous illness that has already caused the quarantine of Chinese cities, Italian towns, cruise ships, and travelers returning home from infected areas among other smaller situations.
Here are ten primary drivers that could have caused the quick market correction of 10% this week.
The risks of the change in people’s behavior that will hurt global economies and corporate earnings must be priced into the stock market, that is what happened this week as the risk of a global pandemic expanded the market adjusted prices based on projected probabilities.
Less travel due to restrictions lowers the demand for oil and could be the main driver of the recent plunge in oil prices. The drop in this commodity price caused the energy sector stocks to plunge as this will hurt their margins and earnings.
The supply chain from Chinese manufacturers to US businesses has been disrupted due to quarantines in Chinese cities. This will hurt sales and earnings.
The Disney theme park closures in China could cost the company $280 million and could be a preview of the beginning of problems with other public places around the world needing to be closed due to the possibility of spreading the infection.
Travel company stocks have dropped on the expectations of lower demand that should affect their profits. Airline stocks also dropped on the potential of less demand for travel.
Microsoft, Apple, and PayPal have already warned about earnings misses caused by the coronavirus. With this happening so early during the outbreak it reflects that most companies will not make their sales and earnings forecast due to the decline in economic activity.
In the state of California, there has been a state of emergency declared in Orange County and San Francisco. This increases the fear and uncertainty in the citizens and can lead to spending less money in public businesses that can affect earnings for publicly traded companies. This could be just the beginning of future US cities being quarantined after cases are reported and adds risks to investments.
The biggest driver of lower stock market prices is caused by the fear of loss of money and the uncertainty of whether this will become a full-blown worldwide pandemic and disrupt business on a large scale. This causes many traders and investors to take risk off by moving their capital out of equities and into cash.
Falling stock prices trigger stop losses, trailing stops, and short selling signals that lead to more selling and accelerates falling prices. Downtrends feed on fear and uncertainty and until the market runs out of people that want to sell at lower prices we will not find a bottom.
When the pattern of infected cases stops increasing and then begins to decline then fear should subside and stock market prices stabilize.
We live in an uncertain time on how this epidemic will play out. The stock market is always trying to price in the risk and probabilities.