A Deeper Look At How And Why Stocks Are Down As Coronavirus Spreads

It has been a volatile week on Wall Street as concerns over the coronavirus grip the international economy, and we are expected to end the week in a decline reminiscent of the 2008 financial crisis. WGBH Morning Edition host Joe Mathieu spoke with National Securities Chief Market Analyst Art Hogan to learn more about how concerned we should be, and what's likely to happen next. The transcript below has been edited for clarity.

Joe Mathieu: There are some people who think this is overdone. There are some who think we're on the brink of a real disaster. But my goodness, after seeing the Dow tumble some 3,000 points in a week, it's bringing back some bad memories.

Art Hogan: It sure is. And the interesting thing — it's just human nature, when markets seem like they've gone up for too long, people are looking for a correction. People call for a correction; they'll say, "I'm going to put new money to work if this market pulls back." But then when it happens, we always assume this is going to be a lot worse than it is. And generally, that doesn't happen. Historically, we have pullbacks every year of somewhere between 5 and 10 percent — we're slightly over that at 12 percent now — but they don't all turn into these massive routs that we saw in 2000, 2007 and 2008. They generally do self-correct.

The problem with this one is the catalyst is something that's even more scary. We don't know how large this coronavirus gets. So last week, we actually felt like China was stabilizing. Factories were opening back up [and] people were going back to work, so we thought that perhaps the peak of this particular global epidemic was happening in real time. And then we started to hear about pockets of new cases being found in places like Korea, Italy and a couple of cases in the United States. And now we think OK, we're just at the beginning of this and not at the end of this.

So what I would tell you is, if you look at the time frame that it took for China to stabilize — this started in December and their numbers are now just sort of peaking and rolling over a bit — that's probably what's going to happen with the rest of this cycle of this. We're going to see that numbers increase and new cases are found and then that will peak out. Then we'll realize that we've gone through another of the 11 global health scares that we've had over the last 20 years.

Mathieu: So you feel like you could see the end of this? This is not something we're going to be still freaking out about at the end of the year?

Hogan: Yeah. So 17 years ago, Ebola happened. And 17 years ago, we weren't quite as sophisticated as we are now in terms of communicating what should be done, getting in front of the news flows and really reacting quickly. I think that the difference now is massive. So the information flow has happened a lot faster. But what's happening even faster is there's already been two different companies that have come up with both a vaccine and a therapeutic that's going into human testing immediately. That's lightning speed. Another company came out yesterday, interestingly, with a rapid test kit for this particular virus.

So the difference now from 17 years ago, when SARS first hit and some of the other epidemics were happening, is that the genetic breakdown of this disease was discovered immediately. We know exactly what this looks like, so now we can find the cure. So what happens is investors will stay on the sidelines and not want to have risk assets for a period of time, and then we'll realize this is over the hump and then investors will slowly get back in and some of those defensive trades will probably unwind.

Mathieu: So it sounds like you're taking solace in the fact that we have a lot more information. You've pointed out that communication is better. But the way you started this whole conversation is interesting. This market was looking pretty frothy, according to a lot of people. We're talking about Dow 30,000 last week. We're now at Dow 25,000. Some people were looking to unload some profits here and waiting for a good excuse. How much of that explains these losses?

Hogan: It's impossible to disaggregate that, but coming through January, after having a year where the market was up about 30 percent, I couldn't find a person that didn't say this market's due for a pullback. Everyone you spoke to was of the mind that we've come too far too fast, and perhaps the market isn't matching the reality of the economy. And that's the feeling we get all the time. I think investors get vertigo when things get too high and look for that reason. So if not for this, there would have been something that we would have said, "this is a reason for the market pullback." This just happened to be a rock solid catalyst because there will be some economic damage. China was shut down for a month. Seventy million people were stuck in their house waiting to see if a case was going to turn into an illness. That part of the economy is very important part of our global supply chains.

So there are a lot of things we can't get right now, but I think it's important to remember: Some of that economic damage will be permanent. We can't travel to Macao again, we can't travel around the country for the global new year [and] we're not going to go to restaurants more next quarter because we didn't go last quarter. That's permanent. That's consumption that's destroyed. But there's consumption that's delayed, and that's things like 'I can't get my iPhone 11 because Foxconn's not open.' So that's delayed consumption and that will probably come back in the second quarter, in the second half.

Mathieu: And that brings new growth in the next quarter, hopefully.

Hogan: That's exactly correct.

Mathieu: There are so many questions that I would love to ask you at this point, but when you try to connect the dots between the actual news — not so much the expectations, but what we know about the coronavirus, the damage that it's had, the announcements that companies have made with regard to their profit forecasts or any warnings that economists might have made — and try to connect that to the stock losses, has it been irrational, or is this the type of loss you would expect?

Hogan: I think it's been very rational. I think that's a great question. So if you're a company near index to China, you've got exposure to China whether because you produce there or you sell into China, you should probably know that you're going to be affected. And you should probably be able to start to calculate that. So we've heard from companies like Apple, MasterCard and United Airlines, and we'll hear from a lot more. But it's a guess, because the guess is, 'I'm not sure how long my production is going to be off line and I'm not sure how long demand for my goods and services is.'

Mathieu: 'I need to warn my shareholders.'

Hogan: I do. I need to get out in front this and say, 'My first quarter certainly doesn't look great. And oh, by the way, we don't have a lot of visibility into the second quarter.' That's rational.

And I will also tell you that the marketplace has been rational in terms of the kind of punishment that's been meted out to those companies that we talked about in travel and leisure that have permanent damage. So if you look at the cruise ships, for example, they're down about 30 percent. The market's down about 12 percent. If you look at the airlines, they're down about 20 percent. So the names that should actually be hurt more, that's actually happening. And then companies that don't have much exposure to China aren't off as much. So there is an equilibrium in terms of, is this market being logical and rational? Yes. Do we oversell? Are we oversold now? Absolutely. That happens every time we get into one of these things.

Mathieu: So at some point, we're going to have a bounce here.

Hogan: Right.