Are Overstimulated Stocks Ignoring Coronavirus Risks?

  • The Wuhan coronavirus is rapidly spreading around the globe and may soon be declared a global pandemic.
  • The crisis is having a significant economic impact on companies, but financial markets remain nonchalant.
  • China’s economic stimulus may be distorting financial markets. The West should avoid falling into the same trap.

The Wuhan coronavirus outbreak has grown into what looks to be the start of a global pandemic. Confirmed cases of the disease have soared to around 78,000 with 2,362 fatalities. The virus is spreading rapidly outside of China due to a series of “super-spreader” events.

Nevertheless, the U.S. stock market continues to hover near all-time highs despite the economic impact on the ground.

Many analysts believe financial markets are failing to price in the massive risk posed by Wuhan coronavirus outbreak. But some of  their proposed solutions may make the problem worse.

Global Equity Prices Remain Stable

The S&P 500 closed at 3,337.75 on Friday – only a few percentages points off from its all-time high of 3,393.52. The Dow Jones is also near record highs, closing at 28,992.41 on Friday.

In China, equity markets are also surprisingly resilient with the Shanghai and Shenzhen exchanges both holding steady as the crisis rages on.

Shockingly, the China large-cap ETF (FX) is actually up over the last six months.

Chinese stocks are completely ignoring the coronavirus. This may be the result of extreme stimulus. | Source: Ycharts.com

The Chinese Communist Party is using authoritarian controls to prop up the stock market.

Earlier in February, the People’s Bank of China injected 100 billion yuan ($14.33 billion) into the financial system through reverse repo operations. It also lowered its benchmark lending rate as well as the rate on its medium-term lending facility.

Chinese authorities are also offering tax incentives to companies to help them deal with the slowdown in business.

These extreme stimulus measures are keeping the Chinese markets…

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