For a moment there, I thought this market would never quit.
You have a virus out there in Asia that's killing people. You have an impeachment trial where you figure that the Democrats must have something up their sleeves, some card they haven't played. And you have execs falling all over themselves in Davos to take action on the environment that will hurt their earnings per share, even as it helps impact per share.
No matter, the market lapped it up. Until, that is, we learned that that virus had reached our shores and Boeing (BA) announced that it expects the MAX aircraft won't come into service until June or July, dashing hopes for an April or May return to service. Boeing's stock had been a model of stoic strength. But now it crumbled.
The coronavirus is precisely the kind of illness that would have decked any other market and it should have crushed our market at the opening. But it took the scourge reaching us and Boeing to flop again to get the downhill push going.
While the virus so far has not resulted in a huge number of fatalities, the fact is that the respiratory virus has not been able to be contained so far -- witness the news from the Centers for Disease Control and Prevention that we have a confirmed case on our own shores, something that saw the average tumble when the news broke. So far, it's produced many fewer deaths as a ratio of those contracting the illness than did SARS, the scourge that hit Asia until 2003. With SARS, some 8,089 got sick and 774 died. But the two diseases are both respiratory illnesses that could spread human to human and therefore very worrisome to a host of industries that could be hurt worldwide.
Is this kind of Asian-related sell-off rational? Yes, initially, for a host of travel related stocks. That's because we know that earnings could get nicked, especially given that we are at the beginning of the Spring Festival -- the Lunar New Year-time -- travel boom, an occasion that sees hundreds of millions of people going on vacation.
"The outbreak is at a critical stage, and we estimate an increasing number of infections during the 40 days of Spring Festival travel rush," said Zhong Nanshan, a Chinese health expert health who discovered SARS, told the Washington Post. The fact that it has infected at least 15 health professionals out of a total of 219 speaks to the illness' virality, even if its respiratory effects don't appear as dangerous as the sickness that struck 17 years ago.
It is totally logical to expect any company that was banking on a surge in traffic to be concerned, and you can expect analysts who cover the cruise lines will cut numbers. Carnival's (CCL) stock fell 28% when SARS struck. It's only down 2% as of Tuesday. The casino companies in Macau could see a traffic dip making them vulnerable for more than just the 5% to 6% decline that Las Vegas Sands (LVS) and Wynn (WYNN) felt. Estee Lauder (EL) , which sells cosmetics in duty free shops in Hong Kong, could see a falloff, too, beyond the 1% and change decline it suffered.
Marriott (MAR) , which bought Starwood, which had a major presence in China, should also see its stock go down as was the case Tuesday, although I suspect you won't even see this one in the numbers. Its stock did fall 12% during the SARS epidemic. The airlines are natural sells, too, especially since someone in this country has contracted the illness. The big international companies saw their stocks go down about 4%.
I mention all of these, however, because that very well could be the extent of the impact and if the entire market goes down in the illness that could be your chance to get into some stocks that might otherwise not be down and have nothing whatsoever to do with Asia. It's the ultimate exogenous event that impacts few, but spreads to many. I suspect it will run its course until drug companies get their arms around the crisis and people simply don't go out as much as they did.
I am betting that it is a short-term issue, as SARS lasted about five months before it petered out. While it is early, I expect the damage to be cordoned like it was with SARS.
The illness now isn't a sideshow. It's front and center and it is dragging everything down, except a few select stocks like Costco (COST) , which got an upgrade Tuesday, timely given the interview set for Tuesday night with CEO Craig Jelinek. Or Beyond Meat (BYND) , which keeps moving up on any news about more adoption of plant-based dishes, like the one we got Tuesday from Starbucks (SBUX) . Or Tesla (TSLA) , which is going up, despite still one more sell-side warning that the stock has run too much. Or Uber (UBER) , which is taking action to curtail losses from Uber Eats, including the shedding of Uber Eats in India. I think that stock has much more room to run.
So what should the market be focused on if this illness could be short-lived? How about one simple word: Davos. That's where the World Economic Forum is being held and we are getting an astonishing outpouring of anti-carbon statements and plans from so many of the large companies. They tend not to be as powerful as what we heard from Satya Nadella when we visited Microsoft (MSFT) last week. He laid out serious plans, not just to be carbon-neutral but carbon-negative -- potentially rolling back all of the carbon it has spewed since it was started in 1975. But they are noteworthy in their cost to the company short-term, and the belief that if they don't take such actions there would be no long-term. I know there is a tendency to say that these companies have to do it because our government has abdicated its duty to push for cleaner air, cleaner water and less carbon emissions. But I think they would have done it anyway.
I don't think anyone is yet trying to game the system by talking about the environment and then doing nothing about it, so-called "green washing." However, given the amount of money coming into sustainability funds, it wouldn't surprise me if the companies that visibly care and can back it up with facts, figures and audits, will ultimately get higher price-to-earnings multiples than those who don't.
Sometimes it is just good business. Elliott partners, one the most rigorous money managers out there has bought a big stake in a utility, Evergy (EVRG) , and is adamant that the company should replace its coal plants aggressively. "De-carbonization," Elliott said in its letter to management, is a must and could be a godsend for a company still heavily powered by coal. Because of the strength of the wind resource in Evegy's service territory, Evergy stands to be a leader in de-carbonization system investments that facilitate renewable's growth and help transition its coal fleet, which still accounts for 40% of its generation. Still the plea from Elliott has nothing to do with the ESG movement. It's what's good for business, the business of power generation.
Ultimately, I think the coronavirus is an exogenous event that allows you to get in to stocks that have nothing to do with travel or casino gambling. It is, however, a good excuse for someone who wants to sell especially because China is not exactly being all that very forthcoming about what's happening. Then again, should we expect anything else?
