COVID-19 Virus Has Stocks Declining

Written by Jennifer Clark
Posted February 19, 2020

The coronavirus, also known as the COVID-19, continues to spread and the number of people infected continues to rise.

At the beginning of this week, the reported number of infected people reached over 73,000, with around 1,500 patients who have died. It has become a global health threat and as we approach the two-month mark since the first reported cases of the virus, people are becoming skeptical about if and when there will be an end in sight. 

Not only is the virus affecting peoples’ health but it's also affecting the economy. China is the world’s second-largest economy, and it has a huge impact on the U.S. economy. China is a massive source for many consumer and industrial products like smartphones, TVs, clothing, pharmaceutical drugs, solar panels, auto parts, and steel. 

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Because of the virus, many Chinese factories have closed down. These factories are essential to a lot of supply chains for Western companies like Apple (NASDAQ: AAPL). David Owen, chief European financial economist of Jefferies LLC said, “Because so many large companies built up extensive supply chains with China, we should expect to see more companies warn on supply chain impacts on revenues.”

On Monday, Apple announced that it doesn’t expect to make its quarterly revenue forecast because of this slowdown, which will cause a lower iPhone supply globally. Apple’s announcement caused U.S. equity averages to fall from record highs. The Dow Jones Industrial Average fell more than 100 points at open on Tuesday.

Apple warned its investors that the company will most likely see disappointing figures in its upcoming earnings call because of the closing of its factories. Even though Apple’s iPhone factories have recently reopened, they seem to be operating a lot slower than initially anticipated.

Another thing to note is the decrease in Chinese demand. While there’s no need to panic, we should be cautious and realistic.

The impact is obvious and the connection goes even deeper. Apple’s suppliers and partners have also been affected by COVID-19. A radio frequency chip supplier for Apple, Qorvo, fell 2.6% on Tuesday. About 30% of Qorvo’s revenues come from Apple.

Analyst Vivek Arya said:

This will have a ripple effect of increased uncertainty and guide-downs across the semiconductor supply chain since Apple’s warning suggests a weak demand environment in China which impacts other smartphone vendors and their respective supply chains also. So the impact is greater than just Apple itself.

The virus will only continue to infect the world’s economy. People are being quarantined in China, which has left millions of people at home and not spending money.  And Chinese workers are not showing up to work at factories, causing a ripple effect. If the virus spreads further west, it will have an even bigger impact on other economies throughout the world. 

On Monday, Credit Suisse said COVID-19’s “impact is more likely demand disruption/dislocation than outright destruction.” Until this virus becomes contained, this type of disruption/dislocation will continue. Companies who rely on China and its factories will need to figure out a plan B before revenues get really hurt. 

Tech companies aren’t the only type of companies feeling the pain from this virus. Large retailers like Starbucks (NASDAQ: SBUX) and McDonald’s (NYSE: MCD) have had to shut down stores in China. Not to mention, Chinese tourism to the U.S. has come to a halt, which will only hurt hotels and restaurants that rely on tourism for revenue.

It’s hard to tell what we can expect in the upcoming months, but if we continue to see the spread of COVID-19 throughout China and into other countries, it could be really bad news for the world's health and its economies. 

Until next time, 

Jennifer Clark
Pro Trader Today
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