Three Ways the Coronavirus Market Correction Could Play Out

The coronavirus stock market correction arrived on 25 February, when Wall Street came to the realization that the Covid-19 outbreak could not be contained in China. The correction began as cases were spiralling out of control in South Korea and Italy, and the top Centers for Disease Control cautioned the US that, “This could be bad.” Four weeks later, we’re sitting at 55,000 cases, and more than 784 deaths, in the US alone. We’ve only just begun to realize how bad this is actually going to get. Still, this too shall pass and already there’s a glimmer of hope as we look at how China has handled the outbreak – more people are recovering than being infected, a sure sign that it is under control. With the stock market practically in shambles, let’s take a look at three ways the Coronavirus market correction could play out.

All is (relatively) well: reflexive response 

The absolute best case scenario would be for the market to undergo a reflexive response. In this scenario, our behaviour will quickly adapt to sufficiently slow the spread of the virus. This would be vital to support McKinsey’s “Quick Recovery” scenario. 

“Younger people are affected enough to change some daily habits (for example, they wash hands more frequently) but not so much that they shift to survival mode and take steps that come at a higher cost.” 

A reflexive response would assume that there would be very limited disruption past the Q1 of 2020, so the S&P 500 could recover back to 3,250 by the end of this year, according to Morgan Stanley.  Still, this is the best case scenario. 

#StockMarket set to collapse despite dramatic intervention by #FederalReserve. It'll recover; resulting recession will be short-lived; stores will restock; schools will eventually reopen; 99.99% will be just fine. #coronavirus & epidemic of anxiety, disruption & stress will pass.

— Geraldo Rivera (@GeraldoRivera) March 16, 2020

The middle way: restrictive response 

The second, and “most plausible” (according to Morgan Stanley) scenario is that Covid-19 infections spike, putting strain on local and regional health care systems in the US and abroad. Governments will have to put more draconian measures in place to stop the spread, further slowing down the economy and extending through Q2. 

This outlook matches McKinsey’s “Global Slowdown” scenario, “In Europe and the United States, transmission is high but remains localized, partly because individuals, firms and governments take strong countermeasures (including school closings and cancellation of public events).”

McKinsey expects the global economy to recover in the second half of the year, with annual economic growth slumping to around 1% to 1.5%. 

This would mean that S&P 500 earnings slip to around 0% growth. Not good. 

The end is nigh: relentless response 

Lastly, and most drastically, of the three ways the coronavirus market correction could play out is a “relentless response.” While we’re hoping that a spring heatwave will decrease transmission of the virus, if it doesn’t we’ll get no respite. China could also suffer a relapse as economic activity spikes. In this case, McKinsey has forecast a longer pandemic and more serious global recession. 

Morgan Stanley’s extended pandemic scenario sees the US entering a recession, with “multiple quarters of negative earnings growth.” The S&P 500 could close out 2020 at 2,750. In a longer pandemic situation, the UBS sees infection rates reaching levels similar to the H1N1 swine flu – so around 1 billion. Worse still is that Covid-19 has a much higher mortality rate, compared to H1N1’s -0.1% rate. 

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The middle way

If the most likely outcome, of a restrictive response, occurs, then we should see the global markets recover by the end of the year. Out of the three ways the coronavirus market correction could play out, the reflexive response would be the best possible option. Still, we’re not out of the woods yet. Infection rates are ramping up worldwide, and we’re still a while away from true spring hitting the Northern Hemisphere. Let’s also not forget that winter is coming to the South, which could prove catastrophic if the virus is not under control by then.