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- Stocks are fresh off their worst week since 2008 as investors grapple with the spreading coronavirus outbreak.
- Predictions around the economic effects of the outbreak are getting more severe - but Wall Street is divided about the best way to react.
- Some experts are still comfortable with big bets on emerging markets like China, which have held up reasonably well of late, while others are telling clients to look for safer choices and tilt toward the US.
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How bad is it going to get?
That's the ultimate question for investors and market experts in the wake of the global stock rout that's accompanied the coronavirus outbreak, resulting in the worst week for stocks since 2008. Will the market and economy steady themselves over the next few weeks, or will growth grind to a halt?
As of Friday, more than 83,000 people have contracted the infection around the world, and almost 2,900 have died. With many people worried and governments searching for the right response, Bank of America Securities US economist Michelle Meyer now thinks the US economy is going to contract for most of this year. And that might not be the worst of it.
"We now expect 3 quarters of a 'growth recession.' Broken global supply chains will deplete inventories and delay investment," she wrote. "But what concerns us more is an adverse feedback loop between consumers and markets."
That is, while multinational companies might struggle with supply problems into the summer or beyond, the bigger risk is that the combination of frightening news and plunging stock prices will scare consumers into spending less. Since that's by far the largest component of the US economy, that "feedback loop" could cause a lot of pain.
"Consumers see the stock market as a gauge of the health of the economy and the state of their personal finances. When the stock market sells off violently, it sends an ominous message," she wrote in a note to clients. While Meyer doesn't think the situation will spiral out of control, that possibility clearly exists.
Morgan Stanley chief cross-asset strategist Andrew Sheets said in his firm's "Thoughts on the Market" podcast that investors in the bond market were worried about the outbreak long before the stock market recognized it as a major threat. And while he sees the current selling as a potential buying opportunity for long-term investors, he adds that stock valuations are high.
"Both the spread of the virus and the lack of more material economic countermeasures to offset its impact have worried markets," he said.
Jim Paulsen, chief investment strategist for the Leuthold Group, goes further and points out that opinions among investors seem sharply divided. While stocks are nosediving, he thinks there are also signs of real optimism in contrast to the downbeat bond market.
"What are Chinese stocks saying when, even though they are at the epicenter of the contemporary crisis, they have been among the best place to hang out in this crisis? Are emerging markets typically a place to hide during a market meltdown?" he asked rhetorically.
He continued: "At a time when investors are worried because the virus is likely to bring global growth to a halt, why would foreign stocks, cyclical stocks, and raw industrial commodity prices be holding up so well?"
Lori Calvasina, head of US equity strategy for RBC, agrees that even when they're selling, investors aren't changing their overall approach in a dramatic way.
"We've continued to sense that the long-only community hasn't been doing much in terms of repositioning portfolios for the coronavirus," she said. She sees that as evidence this slump will most likely end up as a "growth scare," which she's defining as a drop of 14% to 20% for major indexes.
Based on historic data, a recession would result in a drop of as much as 32%, she says.
Mark Haefele, chief investment officer for UBS Global Wealth Management, says he's part of that group, as he's keeping an "Overweight" rating on emerging markets stocks. China is the biggest component of many emerging market indexes.
"Our base case is for a recovery by end-1Q, on the assumption that restrictions (ex-Hubei) are relaxed across China," he wrote. "Companies tell us they expect to reach a normal utilization rate by March, which suggests a manageable impact for the supply chain."
Darrell Cronk, chief investment officer of Wells Fargo Wealth & Investment Management, agreed that a global recession doesn't look likely, but took the opposite approach to emerging markets stocks, downgrading them to "Unfavorable" from "Neutral."
"It is difficult to say that any country has a full handle on containment at this point," he wrote. "Modeling the range of potential scenarios for this type of viral outbreak is imprecise because the unknowns make the range of possibilities wide."
David Kostin, the chief US equity strategist for Goldman Sachs, says the outbreak is likely to wipe out profit growth for US companies this year and adopted a much more defensive tilt, upgrading real estate and utility companies while downgrading industrials and financials.
He's also recommending an "America First" stock profile, pointing to the fundamentals of the US economy.
"Global economic growth is slowing but the US is better positioned than other regions," he wrote. "Firms with high US sales will outperform companies with high foreign sales."
Matt Miskin, chief investment strategist at John Hancock Investment Management, sounds a similar note, writing that his broader approach to the market hasn't changed, and US stocks, larger companies, and high-quality bonds look like even better investments as their prices drop.
"If anything, the recent downside risk to global growth from the coronavirus has increased our conviction in these calls," he said.