Money Matters: A Macro-Economist’s Take On The Coronavirus Impact

The global stock markets continue to get rocked over coronavirus fears with no end in sight with the Dow Jones Industrial Average plummeting 7.8% just in March 9’s trading, the worst single-day loss since the housing crisis that came to a head in 2008. 

The Dow as well as the broader-market S&P500 were both down about 18% over the last month, prompting investors to cash out gains of the 10-plus year bull market as well as reevaluate current valuations of equities. 

“The first thing to understand is corrections in stock markets happen and we’ve just forgotten about them,” Zacks Investment Research chief equity strategist John Blank tells Pollstar. 

“Corrections of 10% or more, 90% of the time a year later the stock market is actually higher. The problem we have here is this probably is a recession.”  

Blank noted the increased need for hospital beds, medication and ICU’s during a pandemic, meaning additional cancellations of mass gatherings as well as quarantines are likely.

“If you’re a policy maker and I present this to you, what do you do? Your best instinct and policy is to jump on this right away [and cancel events]” Blank adds. “This is your problem. You need to explain to people, even though the fear may never materialize.” 

The problem has led to a few large-scale cancellations in major urban areas including huge economic drivers like South By Southwest in Austin and Miami’s Ultra Music Festival.  Tours are also being affected, with Pearl Jam’s North American dates postponed and Santana’s European tour facing a similar effect.

This time could be different from the most recent similar situations in SARS and MERS outbreaks of the previous decade, based on the early numbers as tallied by the Johns Hopkins Medical Center. 

“When I started talking about this a couple weeks ago, we were in the SARS and MERS camps and I was acting like this isn’t a big deal,” Blank says. “But when we’re already looking at 4,000 deaths, 463 in Italy alone and 277 in Iran, those are numbers that people are going to act strongly about in the major government and put these quarantines on people.”  

While the impact of the coronavirus could end up severe enough to cause an economic recession on its own, the long-running bull market that has seen stocks rise steadily over the past 10 or so years means a stock market correction was inevitable at some point.

“This whole coronavirus has been a very convenient excuse to take the market down where it’s supposed to be anyway,” said Blank, who noted that the price-to-earnings ratio of the current S&P 500 index is still at 16.1, which is historically high. “[The markets] could go down a lot from here and still not be cheap,” Blank adds. 

While small-cap stocks tend to get hit harder than large blue-chip stalwarts during a stock market downturn, it is notable Live Nation stock is down 35% in comparison, with Madison Square Garden Company down 25% and Eventbrite 49%, with the company’s market cap down to $966 million at press time. 

There are a number of reasons for smaller-cap stocks being hit harder in these kinds of situations, including a kind of domino effect from momentum trading where large investors and hedge funds may ride a stock for a while and then put in a stop at a certain price level, triggering a massive selloff if it gets below a certain price. 

“A lot of trading in the last two years is trend trading and trend-following machines, and some people had some big money in for two or three years and are now just cashing out to make sure they still have it,” Blank says. “The momentum trading, and the hedge funds that trade to trend and don’t do really do any studying, are just trying to take money out quickly.” 

Blank notes that while countries with more authoritative governments such as China can more readily restrict travel and movement of their citizens, the fact situation seems to be stabilizing there could mean other countries take similar measures, meaning canceled events or travel plans. 

“A year from now this is probably over and you’re fine, which is what you need to remember, but a year can be a long time.”