As tempting as it may be to compare the coronavirus outbreak to the SARS epidemic from 2002 to 2003, a number of Wall Street analysts warn this is a dangerous game since the broader economic backdrop was very different in the early 2000s from what it is today.
“SARS: unfortunately, the analogy doesn’t work,” Bank of America global economist Ethan Harris said in a note to clients Tuesday.
“A broad consensus has emerged that the SARS episode offers an imperfect but reasonable historical analogy for what is happening now. … We think the SARS episode is more misleading than useful.”
He pointed to China’s growth into a major worldwide economy in the intervening years as the key difference. In 2002, China’s GDP was 4% of the global economy. In 2019, that number rose to 16%, Harris said.
The factors fueling economic growth in China are also different today from what they were in the early 2000s. Back then, growth was fueled by investment, Harris said, while today it’s driven by retail sales and consumption services, thereby making the economy more vulnerable to a slowdown in productivity. Additionally, in the intervening years China became a much more mobile country — both internally and externally — which again means it’s now more vulnerable to a health crisis.
Perhaps most importantly, Harris said that unlike in the early 2000s, the government has taken swift action and the quarantines — government-imposed and otherwise — could hit the global economy hardest.
“From an economic perspective, the quarantine is the story, not the number of cases or deaths,” he said.
More than 43,100 cases of the coronavirus have been confirmed, and there have been at least 1,018 deaths. It’s now spread to more than two dozen countries, and on Tuesday the WHO chief said it’s a “very grave threat” to the rest of the world, according to a report from Reuters.
DataTrek Research co-founder Nicholas Colas also pointed to a very different geopolitical backdrop during the SARS epidemic, since it coincided with the runup to the war in Iraq and fears of an oil shortage.
“It is useless to compare how US/global equities fared under SARS in 2003 to the coronavirus today; the invasion of Iraq was the real catalyst for investor sentiment during this time,” Colas said in a note to clients Tuesday.
While the full impact of the virus will not, of course, be felt until it runs its course, a number of companies have already mentioned the impact on their revenue.
On Tuesday, Under Armour said it expects the virus will cut sales by as much as $60 million during the first quarter, while Hasbro’s senior vice president of investor relations, Deb Hancock, said on the company’s fourth-quarter earnings call that “it’s challenging to quantify the potential magnitude at this time.”
During Apple’s first-quarter earnings call on Jan. 28, CEO Tim Cook said the company gave a wider than usual range for forward guidance given the “greater uncertainty” surrounding the ongoing impacts of the outbreak.
Despite individual companies warning about weakness caused by the outbreak, the wider market has shown resilience. After a coronavirus-induced sell-off at the end of January, stocks have been ticking higher. On Tuesday the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all hit record highs.
Oil, on the other hand, hasn’t fared as well. On Monday, U.S. West Texas Intermediate crude as well as international benchmark Brent crude dropped to 13-month lows. Both continue to trade in bear market territory as traders worry that sustained reductions in demand for oil will pressure prices further.
Ned Davis Research’s Warren Pies called the coronavirus outbreak a “black swan” for the oil and energy industries, adding that his best guess is that “crude oil and energy equities will see more weakness before this is over.”
That said, he noted that when determining the next possible move for oil, drawing comparisons between the 2003 SARS outbreak or attempting to forecast the spread of the disease are “fools errands,” arguing that investors should instead rely on “objective indicators.”
— CNBC’s Michael Bloom contributed to this report.