Market Insights

Market sentiment has turned quickly as the deadly coronavirus spreads in China. Let’s consider some key things to know as a new week begins.

Stocks Were Potentially Due for a Pullback

The S&P 500 had a big rally before the disease appeared. In the 15-week period between October 7 and January 17, the index fell only twice.

Increased optimism about the global economy — especially China — helped spur the buying. But now that the Asian country’s restricting travel and quarantining cities, that entire catalyst is at risk.

It’s a Busy Week Aside from Coronavirus

Even without the disease, it was already going to be very busy week for news and events. The market’s biggest companies report earnings and the Federal Reserve has a meeting:

• Tuesday: Apple (AAPL), the most valuable U.S. company by market cap, issues results after the closing bell.
• Wednesday: The Fed issues its monetary statement and has a press conference. Don’t be surprised if Chairman Jerome Powell implies interest rates will stay low, or even be cut, if coronavirus hurts the economy. Microsoft (MSFT), the second most valuable company by market cap, reports earnings after the closing bell.
• Thursday: Gross domestic product (GDP), an important economic report, is due in the premarket. Amazon.com (AMZN), the fourth most valuable company, releases its numbers in the postmarket.

‘Risk On’ Stocks Are Falling

As Market Insights has highlighted in the past, investors often view stocks as “risk-on” or “risk-off.” Risk on includes energy, financials, industrials, small caps and emerging markets. They often benefit from a stronger economy and struggle when growth slows.

Chinese stocks are leading the correction — not a huge surprise. However many of these companies, like Alibaba (BABA), Nio (NIO) and Luckin Coffee (LK), were surging just a few weeks ago. When should traders step in to buy the pullbacks? That could be the most important question this week.

Energy companies, already struggling with a glut of inventory, are falling on the additional risk of travel demand in the world’s biggest country. Should investors buy the pullback, or position for deeper slides in this sector? That’s another big question in coming weeks.

Bitcoin, Housing and Gold Are Up

“Safe havens” include bonds and precious metals like gold and silver. These benefit from lower interest rates and risk-aversion. They could also be active around the Fed meeting on Wednesday.

Bitcoin (BTC) has also been climbing as the coronavirus outbreak worsens. The world’s biggest cryptocurrency has muscled its way higher since late December as investors prepare for “halving” in May. That will reduce the supply of new tokens. Similar events in the past have lifted prices.

Altcoins like Ethereum (ETH) and Bitcoin Cash (BCH) are rising even more quickly than BTC. That kind of price action in the past has also been positive for cryptos.

Finally, housing stocks just broke out to new highs. They could actually benefit from coronavirus because mortgage rates could fall as bond prices rally.

‘Coronavirus Stocks’

When a new catalyst hits the market, traders often identify a handful of stocks as beneficiaries. These currently include:

• Alpha Pro Tech (APT): A small Canadian company making protective gear like medical face masks, lab coats and coveralls.
• Novavax (NVAX): A developer of vaccines for infectious diseases.
• Inovio (INO): Another vaccine company.

At times of panic they can detach themselves from fundamentals and become pure trading vehicles — rallying or falling one headline at a time. Investors might want to remember how speculative they are. Also, once the buzz passes, don’t be surprised if they quickly fade from view.

In conclusion, coronavirus has quickly become a major story. It’s not clear how much worse it will get, and we have no idea of its timeline. However, some basic patterns have already emerged. Hopefully this post helps you prepare for what could be a volatile and active week in the stock market.

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