Equity markets: how to assess economic impact?
In the first half of January, equity markets continued their positive momentum of the past year, thanks to the partial trade agreement between the US and China, and an improving economic outlook. The flare-up of the US-Iran conflict was only short-lived. The coronavirus outbreak in China completely wiped out the month’s performance. The market fears that green shoots of the economic recovery are at risk. To assess the impact of the virus, the comparison with the SARS virus of 2003 is often being made. The market tries to estimate the economic consequences of the virus based on its medical impact (in terms of infectivity and mortality), on its impact on economic activity in China and on China’s importance for the global economy. However, previous epidemics have shown that, in general, the economic impact is short-lived. The closing of the stock market during the last week of January for the Chinese New Year meant that the equity market in China could not react to the virus. The publication of corporate profits for the fourth quarter of 2019 was another focus for attention for the equity markets. By the end of the month, almost half of the S&P500 companies had published their results. These are (traditionally) better than expected, with technology companies in particular performing strongly, with names such as Apple, Amazon and Microsoft. Results from semiconductor producers were also well received. So far, fourth-quarter earnings growth for the S&P500 is still slightly negative (-0.3%). Earnings expectations for the current quarter are revised downwards less than average.