Here’s Why The Coronavirus Story Matters…

By now, you’ve likely heard about coronavirus and the impact it’s making across the globe.

According to CNN, “Coronavirus is transmitted through the air and primarily infects the upper respiratory and gastrointestinal tract of mammals and birds. Though most of the members of the coronavirus family only cause mild flu-like symptoms during infection, SARS-CoV and MERS-CoV can infect both upper and lower airways and cause severe respiratory illness and other complications in humans.”

This story is certainly a serious one, with more cases being confirmed outside of mainland China. However, some media figures are taking the serious and turning it into the sensational. Here’s how British tabloid The Sun is framing the situation:

That headline has everything you need to panic. It’s a DEADLY VIRUS that could potentially affect MILLIONS and even the DOCTORS treating the illness are falling victim to it. Just from the headline, I know it’s time to panic.

But there is much more to the “travel restrictions” story.

What’s Really Going On

The travel restrictions are likely necessary. That’s because of the time of the year when the virus hit — the Chinese New Year, which is an official public holiday celebrated from January 25-30. Traditionally, transit systems are choked with travelers. Last year, the South China Morning Post described it like so:

“While most of China’s motorways are toll roads, the charges are waived during the annual festive season and as a result they become magnets for millions of motorists keen to get home for the holidays – and back again – as quickly as possible.”

China’s motorways become a sea of slow-moving traffic during the Lunar New Year holiday period. | Photo: ChinaFotoPress

In light of this, travel restrictions make sense. On their own, they are not a reason to panic… but they’re the only aspect the media seems to be focused on.

Yet the timing does leave me with a sense of foreboding. As the significance of the problem became known last week, the Shanghai Composite Index, a benchmark index for Chinese stocks, sold off.

On Thursday, the index fell 2.8% in one day. And on Friday, the Chinese stock market was closed for the holiday. The Chinese stock market will remain closed until next Friday, January 31.

Now, that is a problem.

Stock prices reflect all known information immediately. This is an important component of the efficient market hypothesis (EMH), which says market prices reflect everything that is known about a stock or a market.

No one individual knows everything, but the collective actions of all individuals in the market reflect the collective wisdom of the crowd.

To illustrate what I mean with an example, think of what happens when a company makes a positive earnings announcement. Market participants absorb the better-than-expected news, and then immediately incorporate the new information from the announcement into what they think about the stock, including how it’s priced. When Intel recently jumped 7% after reporting better-than-expected earnings, it was a real-time visual of the market incorporating that new information into their view of the stock.

What This Means

Normally, we’d be able to look to Chinese stocks to see how the world is processing important information about coronavirus. But because of the timing of the outbreak, the market is closed, and we are left without an important source of information. That means we could see a very large move in stocks on Friday after the market reopens.

Until then, we can’t assess the full impact of this news on China. All those traffic jams depress economic activity for this week under normal circumstances. If the restrictions continue, oil prices could drop as demand from China decreases. Consumer spending could drop in China. And those factors could affect global trade.

This is, for now, an important story to watch. Friday will be the most important day of the week — and that’s surprising given the fact that the Federal Reserve also meets this week and there are earnings due out from major tech companies. On Friday, Brexit will finally occur… and the Shanghai Composite will be the most important story for traders around the world.

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